Which of the Following Statements Is CORRECT

question 42

Multiple Choice

Which of the following statements is CORRECT?

• A) Liquidity premiums are generally higher on Treasury than corporate bonds.
• B) The maturity premiums embedded in the interest rates on U.S.Treasury securities are due primarily to the fact that the probability of default is higher on long-term bonds than on short-term bonds.
• C) Default risk premiums are generally lower on corporate than on Treasury bonds.
• D) Reinvestment rate risk is lower, other things held constant, on long-term than on short-term bonds.
• E) If the maturity risk premium were zero and interest rates were expected to decrease in the future, then the yield curve for U.S.Treasury securities would, other things held constant, have an upward slope.

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Definitions:

Stock Split

A corporate action that increases the number of a corporation's outstanding shares by dividing each share, which in turn diminishes its price.

American Call Option

A financial derivative allowing the buyer the right, but not the obligation, to buy a specific stock or asset at a predetermined price within a certain time period.

Underlying Asset

The security or asset on which a derivative contract is based, influencing its value and characteristics.

Exercise Price

The predetermined price at which an option's underlying asset can be bought or sold.