If the pure expectations theory of the term structure is correct, which of the f
ID: 2641523 • Letter: I
Question
If the pure expectations theory of the term structure is correct, which of the following statements would be CORRECT?
If a 1-year Treasury bill has a yield to maturity of 7% and a 2-year Treasury bill has a yield to maturity of 8%, this would imply the market believes that 1-year rates will be 7.5% one year from now.
Interest rate (price) risk is higher on long-term bonds, but reinvestment rate risk is higher on short-term bonds.
The yield on a 5-year corporate bond should always exceed the yield on a 3-year Treasury bond.
Interest rate (price) risk is higher on short-term bonds, but reinvestment rate risk is higher on long-term bonds.
An upward-sloping yield curve would imply that interest rates are expected to be lower in the future.
a.If a 1-year Treasury bill has a yield to maturity of 7% and a 2-year Treasury bill has a yield to maturity of 8%, this would imply the market believes that 1-year rates will be 7.5% one year from now.
b.Interest rate (price) risk is higher on long-term bonds, but reinvestment rate risk is higher on short-term bonds.
c.The yield on a 5-year corporate bond should always exceed the yield on a 3-year Treasury bond.
d.Interest rate (price) risk is higher on short-term bonds, but reinvestment rate risk is higher on long-term bonds.
e.An upward-sloping yield curve would imply that interest rates are expected to be lower in the future.
Explanation / Answer
option B is correct answer.
Interest rate (price) risk is higher on long-term bonds, but reinvestment rate risk is higher on short-term bonds. This is correct.