Which of the following statements is implied by the existence of no-arbitrage in a risk-neutral pricing framework?
A) All bonds will have the same expected return irrespective of maturity.
B) Expected long-term bond rates of return will be higher than expected short-term bond rates of return.
C) Each period, bonds of all maturities will have the same expected rate of return.
D) The probability of rates moving up versus moving down is fifty-fifty.

Question

Which of the following statements is implied by the existence of no-arbitrage in a risk-neutral pricing framework? 
A) All bonds will have the same expected return irrespective of maturity.
B) Expected long-term bond rates of return will be higher than expected short-term bond rates of return.
C) Each period, bonds of all maturities will have the same expected rate of return.
D) The probability of rates moving up versus moving down is fifty-fifty.

Quizplus · Accepted Answer

No-arbitrage implies that the expected rate of return must be equal across all bonds of different maturities, as otherwise, an arbitrage opportunity would exist. A and B are not necessarily true in a no-arbitrage framework, and D is not directly related to no-arbitrage.

Which of the Following Statements Is Implied by the Existence