A yield curve constructed using Treasury securities has each of the following components embedded in the nominal interest rates:
A) the real rate, expected inflation and a default risk premium.
B) expected inflation, a default risk premium and a maturity premium.
C) the real rate, expected inflation, and a maturity premium.
D) The real rate, a default risk premium and expected inflation.

Question

Quizplus · Accepted Answer

The nominal interest rates used to construct the yield curve are composed of the real interest rate (which represents the return on an investment after accounting for inflation), expected inflation, and a maturity premium (which compensates investors for the risks associated with holding longer-term investments). There is no default risk premium included in Treasury securities, as they are considered to be free from default risk.

A Yield Curve Constructed Using Treasury Securities Has Each of the Following