Which of the Following Statements Is Most Correct

question 31

Multiple Choice

Which of the following statements is most correct?

• A) 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.
• B) Reinvestment rate risk is lower,other things held constant,on 30-day T-bills than on 30-year T-bonds.
• C) According to the market segmentation theory of the term structure of interest rates,we should normally expect the yield curve to have an upward slope.
• D) The expectations theory of the term structure of interest rates states that borrowers generally prefer to borrow on a long-term basis while savers generally prefer to lend on a short-term basis,and that as a result,the yield curve is normally upward sloping.
• E) If the maturity risk premium were zero and the rate of inflation were expected to increase 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:

Agency

A relationship between two parties in which one party, the agent, is authorized to act on behalf of another party, the principal, in business transactions.

Agreement

One of the four elements necessary for a contract; consists of an offer made by one party, the offeror, and the acceptance of the offer by another party, the offeree.

Agent

Describes a person or entity authorized to act on behalf of another, known as the principal, in dealings with third parties.

Principal

In a contractual or fiduciary relationship, the principal is the party who authorizes an agent to act on their behalf.