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If the pure expectations theory is correct (that is, the maturity risk premium is zero), which of the following is CORRECT? a. A 5-year T-bond would always yield less than a 10-year T-bond. b. The yield curve for corporate bonds may be upward sloping even if the Treasury yield curve is flat. c. An upward-sloping Treasury yield curve means that the market expects interest rates to decline in the future. d. The yield curve for stocks must be above that for bonds, but both yield curves must have the same slope. e. If the maturity risk premium is zero for Treasury bonds, then it must be negative for corporate bonds.

User Pong
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2 Answers

9 votes

Final answer:

The correct statement is option b: The yield curve for corporate bonds may be upward sloping even if the Treasury yield curve is flat.

Step-by-step explanation:

If the pure expectations theory is correct, it means that the maturity risk premium is zero. In this case, the yield curve for Treasury bonds would be flat, meaning that the yield for a 5-year T-bond would be equal to the yield for a 10-year T-bond. Therefore, option A is incorrect. The yield curve for corporate bonds can be upward sloping even if the Treasury yield curve is flat. This is because the interest rates for corporate bonds are influenced by factors such as credit risk and market conditions. So, option b is correct.

An upward-sloping Treasury yield curve indicates that the market expects interest rates to rise in the future, not decline. Therefore, option c is incorrect. There is no direct relationship between the yield curve for stocks and bonds. The yield curve for stocks can have a different slope compared to the yield curve for bonds. So, option d is incorrect.

If the maturity risk premium is zero for Treasury bonds, it does not necessarily mean that it must be negative for corporate bonds. The maturity risk premium for corporate bonds depends on various factors and can be positive, negative, or zero. So, option e is incorrect.

11 votes

Answer:

The answer is A

Step-by-step explanation:

I know this because i did this awhile back have a good day:)

User WarHog
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