Which of the following statements is true?
A)Treasury bonds have zero default risk.
B)The longer the maturity of a bond, the less risky it is.
C)The real risk-free rate incorporates an inflation premium.
D)Liquidity premium is included only for highly liquid securities.
E)The default risk is greater for AAA-rated corporate bonds than for BBB-rated bonds with the same features.

Question

Quizplus · Accepted Answer

Treasury bonds are backed by the full faith and credit of the US government, making them essentially risk-free.

Answer: C 
 The real risk-free rate is the rate investors expect to receive on a risk-free investment, but inflation can erode the value of the investment. Therefore, an additional inflation premium is added to compensate for the expected loss in purchasing power.

Answer: E 
 The credit rating system ranks bonds based on their creditworthiness, with higher ratings indicating lower default risk. Therefore, AAA-rated bonds are considered to have lower default risk than BBB-rated bonds with the same features.

Which of the Following Statements Is True