Inflation Is Expected to Increase Steadily Over the Next 10

question 46

Multiple Choice

Inflation is expected to increase steadily over the next 10 years,there is a positive maturity risk premium on both Treasury and corporate bonds,and the real risk-free rate of interest is expected to remain constant.Which of the following statements is CORRECT?

• A) The yield on 10-year Treasury securities must exceed the yield on 7-year Treasury securities.
• B) The yield on any corporate bond must exceed the yields on all Treasury bonds.
• C) The yield on 7-year corporate bonds must exceed the yield on 10-year Treasury bonds.
• D) The stated conditions cannot all be true - they are internally inconsistent.
• E) The Treasury yield curve under the stated conditions would be humped rather than have a consistent positive or negative slope.

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Definitions:

Economic Profits

Profits exceeding the opportunity costs of all resources used, indicating a return above the normal competition level.

Marginal Revenue

The additional income earned by producing and selling one more unit of a product.

Marginal Costs

The additional cost incurred in producing one more unit of a good or service.

Average Revenue

The amount of income generated per unit of output, calculated by dividing total revenue by the number of units sold.