Final answer:
In a downward-sloping yield curve, a 10-year Treasury coupon bond will have a lower yield to maturity than a one-year Treasury bond. This reflects investor expectations of lower future interest rates. Corporate bonds still offer higher yields due to their greater risk compared to government bonds.
Step-by-step explanation:
When the yield curve is downward sloping, it indicates that shorter-term securities have higher yields than longer-term ones. Therefore, a 10-year Treasury coupon bond would typically have a lower yield to maturity (YTM) relative to a one-year Treasury bond. The YTM reflects the total return an investor will receive by holding the bond until it matures, assuming that all payments are made on schedule and reinvested at the same rate.
In essence, as per the downward-sloping yield curve, investors expect lower interest rates in the future, which is reflected in the long-term bonds having a lower yield compared to short-term bonds. This situation might be indicative of an economic downturn or deflationary expectations.
Considering the information from Figure 17.5, it also highlights that, while rates for corporate bonds and Treasury bonds generally move in tandem, corporate bonds yield more to compensate for the higher default risk when compared to U.S. government debt. Even in a downward-sloping yield curve scenario, this dynamic holds true, with corporate bonds still offering a higher yield in adjustment for the greater risk.