Assuming the Pure Expectations Theory Is Correct,which of the Following

question 49

Multiple Choice

Assuming the pure expectations theory is correct,which of the following statements is CORRECT?

• A) If 2-year Treasury bond rates exceed 1-year rates,then the market must expect interest rates to rise.
• B) If both 2-year and 3-year Treasury rates are 7%,then 5-year rates must also be 7%.
• C) If 1-year rates are 6% and 2-year rates are 7%,then the market expects 1-year rates to be 6.5% in one year.
• D) Reinvestment rate risk is higher on long-term bonds,and interest rate (price)risk is higher on short-term bonds.
• E) Interest rate (price)risk and reinvestment rate risk are relevant to investors in corporate bonds,but these concepts do not apply to Treasury bonds.

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Definitions:

Stock of the Economy

The stock of the economy refers to the total value of all assets and investments available within an economy at a given time.

Expected Standard Deviation

A measure of the amount by which an asset's return is expected to deviate from its average return, used as an indicator of the risk associated with the asset.

Probability Distribution

A function used in statistics to illustrate all potential outcomes and their respective probabilities for a random variable within a fixed range.

Stock of the Economy

This term typically refers to the total value of all goods and resources available in an economy at a given point in time.