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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