A bond trader observes the following information:
$ \cdot $The Treasury yield curve is downward sloping.
$ \cdot $Empirical data indicate that a positive maturity risk premium applies to both Treasury and corporate bonds.
$ \cdot $Empirical data also indicate that there is no liquidity premium for Treasury securities but that a positive liquidity premium is built into corporate bond yields.
On the basis of this information,which of the following statements is most CORRECT?
A) A 10-year corporate bond must have a higher yield than a 5-year Treasury bond.
B) A 10-year Treasury bond must have a higher yield than a 10-year corporate bond.
C) A 5-year corporate bond must have a higher yield than a 10-year Treasury bond.
D) The corporate yield curve must be flat.
E) Since the Treasury yield curve is downward sloping,the corporate yield curve must also be downward sloping.

Question

A bond trader observes the following information: 
$ \cdot $The Treasury yield curve is downward sloping. 
$ \cdot $Empirical data indicate that a positive maturity risk premium applies to both Treasury and corporate bonds. 
$ \cdot $Empirical data also indicate that there is no liquidity premium for Treasury securities but that a positive liquidity premium is built into corporate bond yields.
On the basis of this information,which of the following statements is most CORRECT?
A) A 10-year corporate bond must have a higher yield than a 5-year Treasury bond.
B) A 10-year Treasury bond must have a higher yield than a 10-year corporate bond.
C) A 5-year corporate bond must have a higher yield than a 10-year Treasury bond.
D) The corporate yield curve must be flat.
E) Since the Treasury yield curve is downward sloping,the corporate yield curve must also be downward sloping.

Quizplus · Accepted Answer

The Answer of A bond trader observes the following information: 
$ \cdot $The Treasury yield curve is downward sloping. 
$ \cdot $Empirical data indicate that a positive maturity risk premium applies to both Treasury and corporate bonds. 
$ \cdot $Empirical data also indicate that there is no liquidity premium for Treasury securities but that a positive liquidity premium is built into corporate bond yields.
On the basis of this information,which of the following statements is most CORRECT?
A) A 10-year corporate bond must have a higher yield than a 5-year Treasury bond.
B) A 10-year Treasury bond must have a higher yield than a 10-year corporate bond.
C) A 5-year corporate bond must have a higher yield than a 10-year Treasury bond.
D) The corporate yield curve must be flat.
E) Since the Treasury yield curve is downward sloping,the corporate yield curve must also be downward sloping.

A Bond Trader Observes the Following Information ⋅ \cdot ⋅ The Treasury Yield Curve Is Downward Sloping

A Bond Trader Observes the Following Information $\cdot$ The Treasury Yield Curve Is Downward Sloping