In the Foreseeable Future,the Real Risk-Free Rate of Interest,r*,is Expected

question 23

Multiple Choice

In the foreseeable future,the real risk-free rate of interest,r*,is expected to remain at 3%,inflation is expected to steadily increase,and the maturity risk premium is expected to be 0.1(t − 1) %,where t is the number of years until the bond matures.Given this information,which of the following statements is CORRECT?

• A)The yield on 2-year Treasury securities must exceed the yield on 5-year Treasury securities.
• B)The yield on 5-year Treasury securities must exceed the yield on 10-year corporate bonds.
• C)The yield on 5-year corporate bonds must exceed the yield on 8-year Treasury bonds.
• D)The yield curve must be "humped."
• E)The yield curve must be upward sloping.

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Definitions:

Variable Costing

An accounting approach where only variable costs are included in the cost of goods sold and fixed overhead costs are treated as period expenses.

Income Statement

A financial statement that shows a company's revenues, expenses, and net income over a specific period.

Absorption Costing

An accounting method that includes all manufacturing costs (direct labor, direct materials, and both variable and fixed overhead) in the cost of a product.

Variable Costing

An accounting method that considers only variable costs for product costing, excluding fixed manufacturing overhead from the cost of goods sold.