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:

Dividends

Payments made by a corporation to its shareholder members, usually derived from the company's profits.

Backlog

Orders that have been received but not delivered to the customer.

Orders Received

The total number of orders that a company gets from its customers within a certain period.

Long-Term Investments

Assets that are more than 1 year old and are carried on the balance sheet at cost or book value with no appreciation.