Inflation Is Expected to Increase Steadily Over the Next 10

question 46

Multiple Choice

Inflation is expected to increase steadily over the next 10 years,there is a positive maturity risk premium on both Treasury and corporate bonds,and the real risk-free rate of interest is expected to remain constant.Which of the following statements is CORRECT?

• A) The yield on 10-year Treasury securities must exceed the yield on 7-year Treasury securities.
• B) The yield on any corporate bond must exceed the yields on all Treasury bonds.
• C) The yield on 7-year corporate bonds must exceed the yield on 10-year Treasury bonds.
• D) The stated conditions cannot all be true - they are internally inconsistent.
• E) The Treasury yield curve under the stated conditions would be humped rather than have a consistent positive or negative slope.

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Definitions:

Equity Method

The equity method is an accounting technique used to record investments in other companies, typically reflecting the owning company's fair share of the investee's net income.

Cash Dividends

Payments made by a corporation to its shareholders, usually as a distribution of profits.

Investment Account

An account held at a financial institution that is used to hold securities, cash, and other investments in the financial markets.

Significant Influence

The capacity of an investor to affect the financial or operating policies of an investee, typically through ownership of a significant but not majority share.