Which of the following statements is true?
A) The longer the maturity of a security, the greater its interest rate risk.
B) If investors believe inflation will be subsiding in the future, the prevailing yield will be upward sloping.
C) The real rate of interest varies with the business cycle, with the lowest rates seen at the end of a period of business expansion and the highest at the bottom of a recession.
D) The interest rate risk premium always adds a downward bias to the slope of the yield curve.

Question

Quizplus · Accepted Answer

The longer the maturity of a security, the more time there is for interest rates to change, making it more susceptible to interest rate risk.

(Note: Choice B is incorrect because if investors believe inflation will be subsiding in the future, the yield curve will be downward sloping. Choice C is incorrect because the real rate of interest is generally higher during periods of economic expansion and lower during recessions. Choice D is incorrect because the interest rate risk premium can add an upward or downward bias to the slope of the yield curve depending on current market conditions.)

Which of the Following Statements Is True