The Wall Street Journal states that the yield curve for Treasuries is downward sloping and there is no liquidity premium or maturity risk premium. Given this information, which of the following statements is correct?

Question

Quizplus · Accepted Answer

A downward sloping yield curve suggests that shorter-term rates are higher than longer-term rates, indicating that investors expect a weak economic outlook in the coming years. Additionally, the absence of any premium for liquidity or maturity risk suggests that the shape of the yield curve is purely a reflection of market expectations for interest rates. Therefore, a 5-year corporate bond should have a higher yield than a 30-year Treasury bond. Choice A is incorrect because it assumes that corporate bonds will follow the same pattern as Treasuries, which may not be the case. Choice C is also incorrect because it assumes that corporate bonds and Treasuries will have the same yield, which is not necessarily true given the current yield curve shape. Choice D is incorrect because only choice B is correct.

The Wall Street Journal States That the Yield Curve for Treasuries