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 1-year T-bond?
A) The yield on the 10-year bond is less than the yield on a 1-year bond.
B) The yield on a 10-year bond will always be higher than the yield on a 1-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

When the yield curve is downward sloping, it indicates that short-term interest rates are higher than long-term interest rates. Therefore, the yield to maturity on a 10-year Treasury coupon bond will be less than the yield to maturity on a 1-year T-bond. This is because investors demand a higher return on shorter-term investments when interest rates are expected to decline in the future.

If the Yield Curve Is Downward Sloping,what Is the Yield