In the foreseeable future,the real risk-free rate of interest,r*,is expected to remain at 3%,inflation is expected to steadily increase,and the maturity risk premium is expected to be 0.1(t − 1)%,where t is the number of years until the bond matures.Given this information,which of the following statements is CORRECT?
A)The yield on 2-year Treasury securities must exceed the yield on 5-year Treasury securities.
B)The yield on 5-year Treasury securities must exceed the yield on 10-year corporate bonds.
C)The yield on 5-year corporate bonds must exceed the yield on 8-year Treasury bonds.
D)The yield curve must be "humped."
E)The yield curve must be upward sloping.

Question

Quizplus · Accepted Answer

The yield curve must be upward sloping because inflation is expected to increase steadily, and the maturity risk premium increases with the term, both contributing to higher yields for longer maturities.

In the Foreseeable Future,the Real Risk-Free Rate of Interest,r*,is Expected