Which of the following statements is CORRECT?
A) The yield on a 3-year Treasury bond cannot exceed the yield on a 10 year Treasury bond.
B) The yield on a 2-year corporate bond should always exceed the yield on a 2-year Treasury bond.
C) The yield on a 3-year corporate bond should always exceed the yield on a 2-year corporate bond.
D) The yield on a 10-year AAA-rated corporate bond should always exceed the yield on a 5-year AAA-rated corporate bond.
E) The following represents a “possibly reasonable” formula for the maturity risk premium on bonds: MRP = -0.1%(t), where t is the years to maturity.

Question

Which of the following statements is CORRECT?
A) The yield on a 3-year Treasury bond cannot exceed the yield on a 10 year Treasury bond.
B) The yield on a 2-year corporate bond should always exceed the yield on a 2-year Treasury bond.
C) The yield on a 3-year corporate bond should always exceed the yield on a 2-year corporate bond.
D) The yield on a 10-year AAA-rated corporate bond should always exceed the yield on a 5-year AAA-rated corporate bond.
E) The following represents a “possibly reasonable” formula for the maturity risk premium on bonds:  MRP = -0.1%(t), where t is the years to maturity.

Quizplus · Accepted Answer

A 2-year corporate bond typically carries a higher risk than a 2-year Treasury bond because it is issued by a corporation rather than the government. Therefore, investors demand a higher yield on the corporate bond to compensate them for taking on this additional risk. However, there may be exceptions where the yield on a 2-year Treasury bond is higher than a 2-year corporate bond, such as during periods of economic uncertainty when investors flock to safer assets like Treasury bonds.

Which of the Following Statements Is CORRECT