The yield on a one-year Treasury bond is 5 percent, and the yield on a two-year Treasury

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The yield on a one-year Treasury bond is 5 percent, and the yield on a two-year Treasury bond is 6 percent. Assume that the pure expectations theory holds and that the market is in equilibrium. Which of the following statements is correct?

The maturity risk premium is negative.

The market expects one-year interest rate during the second year to be 7 percent.

The default risk premium is highest for Year 2.

Interest rates are expected to fall over the next two years by 3 percent.

The liquidity risk premium is highest for Year 1

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CFIN

ISBN: 978-1305666870

5th edition

Authors: Scott Besley, Eugene Brigham

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Posted Date: Jul 25, 2019 02:38 AM

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The yield on a one-year Treasury bond is 5 percent, and the yield on a two-year Treasury

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