Which of the following statements is correct?

Question

Quizplus · Accepted Answer

This statement is known as the "credit spread puzzle" which suggests that corporate bonds should have higher yields than treasury bonds due to the higher default risk associated with corporations. However, empirical evidence has shown that this is not always the case and corporate bonds can sometimes have lower yields than treasury bonds. Therefore, statement B is incorrect. Statement A is incorrect because the unbiased expectations theory suggests that the return for holding a 2-year bond to maturity is equal to the average of expected short-term interest rates over the 2-year period. Statement C is incorrect because an inverted yield curve is not typical and is considered a signal of an upcoming economic downturn. Statement D is incorrect because the rates on different maturity Treasuries can vary and there is no guarantee that a shorter-term Treasury will always have a lower rate than a longer-term Treasury.

Which of the Following Statements Is Correct