Assume That the Risk-Free Zero Rates Are Increasing with Maturity

question 19

Multiple Choice

Assume that the risk-free zero rates are increasing with maturity (That is, the 6-months zero rate is lower than the one-year zero rate, which is lower than the two-year zero rate, etc) . It must be that:

• A) The yield-to-maturity curve for coupon bonds lies below the yield-to-maturity curve for zeros
• B) The yield-to-maturity curve for coupon bonds equals the yield-to-maturity curve for zeros
• C) The yield-to-maturity curve for coupon bonds lies above the yield-to-maturity curve for zeros
• D) The yield-to-maturity curve for coupon bonds lies above the yield-to-maturity curve for zeros for maturities less than one year, but lies below the yield-to-maturity curve for zeros for maturities greater than one year.

---

Definitions:

Capital

Resources or assets used in the production of goods and services, such as machinery, buildings, and equipment.

Resources

Inputs used in the production of goods and services, including labor, capital, land, and technology.

New Capital

Funds or equity obtained by a company for the purpose of furthering its business objectives, or the addition of assets.

Investment

The action or process of allocating resources, usually money, with the expectation of generating an income or profit.