Which of the following statements is CORRECT?
A) If the maturity risk premium were zero and interest rates were expected to decrease in the future,then the yield curve for U.S.Treasury securities would,other things held constant,have an upward slope.
B) Liquidity premiums are generally higher on Treasury than corporate bonds.
C) The maturity premiums embedded in the interest rates on U.S.Treasury securities are due primarily to the fact that the probability of default is higher on long-term bonds than on short-term bonds.
D) Default risk premiums are generally lower on corporate than on Treasury bonds.
E) Reinvestment risk is lower,other things held constant,on long-term than on short-term bonds.

Question

Quizplus · Accepted Answer

Reinvestment risk refers to the uncertainty of future interest rates and the potential impact on future cash flows from investments. Long-term bonds are generally more sensitive to changes in interest rates than short-term bonds, which means that reinvestment risk is generally lower on long-term bonds. Therefore, statement E is correct. The other statements are incorrect as follows: A) If interest rates are expected to decrease, the yield curve would have a downward slope; B) Liquidity premiums are generally higher on corporate bonds than on Treasury bonds; C) Maturity premiums are primarily due to the uncertainty of future interest rates, not default risk; and D) Default risk premiums are generally higher on corporate bonds than on Treasury bonds.

Which of the Following Statements Is CORRECT