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

Given the information that the real risk-free rate is expected to remain constant, inflation is expected to steadily increase, and the maturity risk premium increases with time, the yield curve would be upward sloping. This is because longer-term bonds will have higher yields to compensate for the higher expected inflation and the increasing maturity risk premium over time.

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