If the pure expectations theory of the term structure is correct,which of the following statements would be CORRECT?
A) An upward-sloping yield curve would imply that interest rates are expected to be lower in the future.
B) If a 1-year Treasury bill has a yield to maturity of 7% and a 2-year Treasury bill has a yield to maturity of 8%,this would imply the market believes that 1-year rates will be 7.5% one year from now.
C) The yield on a 5-year corporate bond should always exceed the yield on a 3-year Treasury bond.
D) Interest rate (price)risk is higher on long-term bonds,but reinvestment rate risk is higher on short-term bonds.
E) Interest rate (price)risk is higher on short-term bonds,but reinvestment rate risk is higher on long-term bonds.

Question

Quizplus · Accepted Answer

The pure expectations theory suggests that the shape of the yield curve reflects market expectations of future interest rates. It does not directly address corporate vs. Treasury yields or specific future rate predictions. However, it is generally accepted that long-term bonds have higher interest rate (price) risk due to their longer duration, while short-term bonds face higher reinvestment rate risk because the principal is returned sooner, necessitating reinvestment at potentially lower rates.

If the Pure Expectations Theory of the Term Structure Is