Business, 31.10.2019 04:31, suewignall
The real risk-free rate is expected to remain constant at 3% in the future, a 2% rate of inflation is expected for the next 2 years, after which inflation is expected to increase to 4%, and there is a positive maturity risk premium that increases with years to maturity. given these conditions, which of the following statements is correct?
(a) the yield on a 2-year t-bond must exceed that on a 5-year t-bond.
(b) the yield on a 5-year treasury bond must exceed that on a 2-year treasury bond.
(c) the yield on a 7-year treasury bond must exceed that of a 5-year corporate bond.
(d) the conditions in the problem 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.
Answers: 1
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The real risk-free rate is expected to remain constant at 3% in the future, a 2% rate of inflation i...
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