If the yield curve is downward sloping, which of the following statements is cor
ID: 2709858 • Letter: I
Question
If the yield curve is downward sloping, which of the following statements is correct? (hint: graph the yield curves for a Tbond, a AAA bond, and a B bond)
a) The yield on the 5-year T-bond must exceed the yield on the 10-year AAA corporate bond.
b) The yield on the 5-year AAA corporate bond must exceed the yield on 5-year B corporate bond.
c) The yield on the 5-year AAA corporate bond must be lower the yield on the 5-year T-bond.
d) The yield on the 5-year T-bond must exceed the yield on the 5-year AAA corporate bond.
e) The yield on the 10-year T-bond must be less than the yield on a 2-year T-bond.
Explanation / Answer
If yield curve is downward sloping, the short term maturities will have a higher yield than long term maturities
(a) The yield on 5-year T-bond must exceed the yield on 10-year AAA corporate Bond
(b) The Yield on 5 year AAA corporate bond must exceed the yield on 5-year B Corporate Bond
(c) The yield on 5-year AAA corporate Bond must be lower than the yield of 5-year T-Bond
(d) The yield on 5-year T-bond must exceed on 5-year AAA corporate bond
(e) The yield on the 10-year T-bond must be less than the yield on a 2-year T-bond