Everything else the same, if the yield curve is downward sloping, what is the yield to maturity on a 10-year Treasury coupon bond, relative to that on a one-year Treasury bond (T-bond)?
A)The yield on the 10-year bond is less than the yield on a one-year bond.
B)The yield on a 10-year bond will always be higher than the yield on a one-year bond because of maturity premiums.
C)It is impossible to tell without knowing the coupon rates of the bonds.
D)The yields on the two bonds are equal.
E)It is impossible to tell without knowing the relative risks of the two bonds.

Question

Quizplus · Accepted Answer

An downward sloping yield curve typically indicates that investors expect interest rates to fall in the future. In this scenario, the yield to maturity on a 10-year Treasury coupon bond would be lower than the yield on a one-year Treasury bond. This is because the lower yields on longer-term bonds reflect the expectation of lower future interest rates, which reduces the overall return investors can expect to earn over the life of the bond.

Everything Else the Same, If the Yield Curve Is Downward