If the pure expectations theory is correct (that is,the maturity risk premium is zero),which of the following is CORRECT?
A) An upward-sloping Treasury yield curve means that the market expects interest rates to decline in the future.
B) A 5-year T-bond would always yield less than a 10-year T-bond.
C) The yield curve for corporate bonds may be upward sloping even if the Treasury yield curve is flat.
D) The yield curve for stocks must be above that for bonds,but both yield curves must have the same slope.
E) If the maturity risk premium is zero for Treasury bonds,then it must be negative for corporate bonds.

Question

Quizplus · Accepted Answer

The pure expectations theory suggests that the shape of the yield curve reflects market expectations about future interest rates. It does not account for risk premiums. Thus, even if the Treasury yield curve is flat (indicating no expected change in interest rates), the corporate bond yield curve can still be upward sloping due to credit risk premiums that are not related to interest rate expectations.

If the Pure Expectations Theory Is Correct (That Is,the Maturity