In the Foreseeable Future,the Real Risk-Free Rate of Interest,r*,is Expected

question 56

Multiple Choice

In the foreseeable future,the real risk-free rate of interest,r*,is expected to remain at 3%,inflation is expected to steadily increase,and the maturity risk premium is expected to be 0.1(t -
1) %,where t is the number of years until the bond matures.Given this information,which of the following statements is CORRECT?

• A) The yield on 2-year Treasury securities must exceed the yield on 5-year Treasury securities.
• B) The yield on 5-year Treasury securities must exceed the yield on 10-year corporate bonds.
• C) The yield on 5-year corporate bonds must exceed the yield on 8-year Treasury bonds.
• D) The yield curve must be "humped."
• E) The yield curve must be upward sloping.

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Definitions:

Financial Break-Even

The point at which total revenues are equal to total fixed and variable costs, resulting in a net income of zero.

Soft Rationing

Internal limitations set by a company on the amount of funds allocated for new investments or projects.

Operating Leverage

A measure of how revenue growth translates into growth in operating income, demonstrating the proportion of fixed versus variable costs a company has.

Fixed Costs

Expenses that remain constant regardless of how much is produced or sold, including rent, salaries, and insurance costs.