A Bond Trader Observes the Following Information $\cdot$ The Treasury Yield Curve Is Downward Sloping

question 3

Multiple Choice

A bond trader observes the following information:
$\cdot$ The Treasury yield curve is downward sloping.
$\cdot$ Empirical data indicate that a positive maturity risk premium applies to both Treasury and corporate bonds.
$\cdot$ Empirical data also indicate that there is no liquidity premium for Treasury securities but that a positive liquidity premium is built into corporate bond yields.
On the basis of this information,which of the following statements is most CORRECT?

• A) A 10-year corporate bond must have a higher yield than a 5-year Treasury bond.
• B) A 10-year Treasury bond must have a higher yield than a 10-year corporate bond.
• C) A 5-year corporate bond must have a higher yield than a 10-year Treasury bond.
• D) The corporate yield curve must be flat.
• E) Since the Treasury yield curve is downward sloping,the corporate yield curve must also be downward sloping.

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Definitions:

Internalization

Conformity to a social norm prompted by true acceptance of the beliefs, values, and attitudes that underlie the norm.

Internalization

The process of incorporating or integrating ideas, values, and beliefs into one's own worldview or organizational practices.

Effect Dependence

Reliance on others due to their capacity to provide rewards and punishment.

Information Dependence

Reliance on others for information about how to think, feel, and act.