Which of the following statements is CORRECT?
A) if the maturity risk premium (mrp) is greater than zero, then the yield curve must have an upward slope.
B) because long-term bonds are riskier than short-term bonds, yields on long-term treasury bonds will always be higher than yields on short-term t-bonds.
C) if the maturity risk premium (mrp) equals zero, the yield curve must be flat.
D) the yield curve can never be downward sloping.
E) if inflation is expected to increase in the future, and if the maturity risk premium (mrp) is greater than zero, then the yield curve will have an upward slope.

Question

Quizplus · Accepted Answer

The slope of the yield curve depends primarily on expected inflation and the MRP. The greater the expected increase in inflation, and the higher the MRP, the steeper the slope of the yield curve. If inflation is expected to decline, then even if the MRP is positive, the curve could still have a downward slope.

Which of the Following Statements Is CORRECT