Assume the Following: the Real Risk-Free Rate,r*,is Expected to Remain

question 18

Multiple Choice

Assume the following: The real risk-free rate,r*,is expected to remain constant at 3%.Inflation is expected to be 3% next year and then to be constant at 2% a year thereafter.The maturity risk premium is zero.Given this information,which of the following statements is CORRECT?

• A) The yield curve for U.S.Treasury securities will be upward sloping.
• B) A 5-year corporate bond must have a lower yield than a 5-year Treasury security.
• C) A 5-year corporate bond must have a lower yield than a 7-year Treasury security.
• D) The real risk-free rate cannot be constant if inflation is not expected to remain constant.
• E) This problem assumed a zero maturity risk premium,but that is probably not valid in the real world.