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 real risk-free rate is higher for corporate than for Treasury bonds.
C) Most evidence suggests that the maturity risk premium is zero.
D) Liquidity premiums are higher for Treasury than for corporate bonds.
E) The pure expectations theory states that the maturity risk premium for long-term Treasury bonds is zero and that differences in interest rates across different Treasury maturities are driven by expectations about future interest rates.

Question

Quizplus · Accepted Answer

The pure expectations theory asserts that the term structure of interest rates is determined solely by expectations of future interest rates. According to this theory, the maturity risk premium on long-term Treasury bonds is zero, and differences in interest rates among different Treasury maturities reflect expectations about future interest rates. Therefore, statement E is correct. Statements A, B, C, and D are incorrect because the yield on a 3-year Treasury bond can exceed the yield on a 10-year Treasury bond, the real risk-free rate is typically lower for corporate bonds than for Treasury bonds, there is evidence supporting the existence of a maturity risk premium, and liquidity premiums are generally higher for corporate bonds than for Treasury bonds.

Which of the Following Statements Is CORRECT