If the Treasury Yield Curve Is Downward Sloping,how Should the Yield

question 74

Multiple Choice

If the Treasury yield curve is downward sloping,how should the yield to maturity on a 10-year Treasury coupon bond compare to that on a 1-year T-bill?

• A) The yield on a 10-year bond would be less than that on a 1-year bill.
• B) The yield on a 10-year bond would have to be higher than that on a 1-year bill because of the maturity risk premium.
• C) It is impossible to tell without knowing the coupon rates of the bonds.
• D) The yields on the two securities would be equal.
• E) It is impossible to tell without knowing the relative risks of the two securities.

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Definitions:

Interest Expense

The cost incurred by an entity for borrowed funds over a period, reflected in its income statement.

Contractual Interest Rate

The agreed-upon rate of interest to be paid on loans or bonds, specified within a contract.

Annual Rate

A yearly interest rate that accounts for compounding over a 12-month period.

Term Bonds

Term bonds are bonds that mature on a single date, with the principal amount being repaid at the end of the bond term.