Inflation is expected to increase steadily over the next 10 years, there is a ne
ID: 2641386 • Letter: I
Question
Inflation is expected to increase steadily over the next 10 years, there is a negative 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 is less than 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.Explanation / Answer
E The Treasury yield curve under the stated conditions would be humped rather than have a consistent positive or negative slope.