A Bond Trader Observes the Following Information

question 78

Multiple Choice

A bond trader observes the following information:
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•The Treasury yield curve is downward sloping.
•Empirical data indicate that a positive maturity risk premium applies to both Treasury and corporate bonds.
•Empirical data also indicate that there is no liquidity premium for Treasury securities but that a positive liquidity premium is built into corporate bond yields.
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On the basis of this information,which of the following statements is most CORRECT?

• A)A 10-year corporate bond must have a higher yield than a 5-year Treasury bond.
• B)A 10-year Treasury bond must have a higher yield than a 10-year corporate bond.
• C)A 5-year corporate bond must have a higher yield than a 10-year Treasury bond.
• D)The corporate yield curve must be flat.
• E)Since the Treasury yield curve is downward sloping, the corporate yield curve must also be downward sloping.

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Definitions:

Systems Theory

A conceptual framework that examines how various components of a system interact and influence each other within the whole.

Positive Feedback

Feedback that stimulates change.

External Stimuli

Things that are visual (sight), auditory (hearing), olfactory (smell), tactile (touch), and gustatory (taste).

Basic Need

Fundamental requirements necessary for individuals to live a healthy and sustainable life, including food, water, shelter, and security.