If the yield curve is upward sloping, then the marketable securities held in a firm's portfolio, assumed to be held for emergencies, should be which of the following?
A) They should consist mainly of long-term securities because those pay higher rates.
B) They should consist mainly of short-term securities because those pay higher rates.
C) They should consist mainly of government securities to minimize interest rate risk.
D) They should consist mainly of short-term securities to minimize interest rate risk.

Question

Quizplus · Accepted Answer

When the yield curve is upward sloping, short-term securities pay higher rates than long-term securities. Therefore, to maximize returns on marketable securities held for emergencies, a firm should hold mainly short-term securities. Additionally, holding short-term securities will minimize interest rate risk because they will mature and can be reinvested at higher rates as rates continue to rise.

If the Yield Curve Is Upward Sloping, Then the Marketable