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

question 62

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:

Book Value

The net value of a company's assets as recorded on the balance sheet, calculated as total assets minus intangible assets and liabilities.

Markup Percentage

It is a percentage added to the cost of a product to determine the selling price, reflecting the profit margin the seller aims to achieve.

Product Cost Method

An accounting method used to assign costs to inventory and cost of goods sold, including direct materials, direct labor, and manufacturing overhead.

Differential Cost

The difference in total cost between two alternatives in making a business decision.