If the Pure Expectations Theory Is Correct (That Is,the Maturity

question 61

Multiple Choice

If the pure expectations theory is correct (that is,the maturity risk premium is zero) ,which of the following is CORRECT?

• A) An upward-sloping Treasury yield curve means that the market expects interest rates to decline in the future.
• B) A 5-year T-bond would always yield less than a 10-year T-bond.
• C) The yield curve for corporate bonds may be upward sloping even if the Treasury yield curve is flat.
• D) The yield curve for stocks must be above that for bonds,but both yield curves must have the same slope.
• E) If the maturity risk premium is zero for Treasury bonds,then it must be negative for corporate bonds.

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Definitions:

Investment

The allocation of resources, such as capital or time, in order to generate future profit or income.

Usury Laws

Statutes that set maximum interest rates that can be charged on loans, intended to protect consumers from excessively high rates.

Interest Rates

The cost of borrowing money or the return on investment, typically expressed as a percentage of the principal.

Present Value

The current value of a future sum of money or stream of cash flows given a specified rate of return.