A bond trader observes the following information: The Treasury yield curve is downward sloping. Empirical
Question:
A bond trader observes the following information:
• The Treasury yield curve is downward sloping.
• Empirical data indicate that a positive maturity risk premium applies to both Treasury and corporate bonds.
• Empirical data also indicate that there is no liquidity premium for Treasury securities but that a positive liquidity premium is built into corporate bond yields.
On the basis of this information, which of the following statements is most CORRECT?
a. A 10-year corporate bond must have a higher yield than a 5-year Treasury bond.
b. A 5-year corporate bond must have a higher yield than a 10-year Treasury bond.
c. Since the Treasury yield curve is downward sloping, the corporate yield curve must also be downward sloping.
d. A 10-year Treasury bond must have a higher yield than a 10-year corporate bond.
e. The corporate yield curve must be flat.
Fundamentals of Financial Management
ISBN: 978-1337395250
15th edition
Authors: Eugene F. Brigham, Joel F. Houston