If the Pure Expectations Theory Is Correct (That Is,the Maturity

question 61

Multiple Choice

If the pure expectations theory is correct (that is,the maturity risk premium is zero) ,which of the following is CORRECT?

• A) An upward-sloping Treasury yield curve means that the market expects interest rates to decline in the future.
• B) A 5-year T-bond would always yield less than a 10-year T-bond.
• C) The yield curve for corporate bonds may be upward sloping even if the Treasury yield curve is flat.
• D) The yield curve for stocks must be above that for bonds,but both yield curves must have the same slope.
• E) If the maturity risk premium is zero for Treasury bonds,then it must be negative for corporate bonds.

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Definitions:

Preferred Stockholders

Investors who own preferred shares in a company, with rights to dividends before common stockholders and priority in asset distribution.

Dividends in Arrears

Dividends on preferred stock that have been declared but not paid to shareholders.

Stock Split

A corporate action where a company divides its existing shares into multiple shares to boost the liquidity of the shares, though the overall market capitalization remains the same.

Par Value

Par value is the nominal or face value of a stock or bond as stated by the issuer, which often bears no relation to its market value.