A Bond Trader Observes the Following Information: the Treasury

question 30

Multiple Choice

A bond trader observes the following information: 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. 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:

Ordinary Annuity

Similar financial remittances effected at each segment's end over a designated time.

Periodic Payment

Regular payments made over a period, such as monthly mortgage or insurance payments.

Ordinary Annuity

Uniform compensation packages delivered upon concluding every phase over a defined schedule.

Periodic Payment

A recurring payment made over a set interval of time, such as monthly or annually, often associated with loans or investments.