Which of the following statements is CORRECT? The higher the maturity risk premi

Question

Which of the following statements is CORRECT? The higher the maturity risk premium, the higher the probability that the yield curve will be inverted. The most likely explanation for an inverted yield curve is that investors expect inflation to increase. The most likely explanation for an inverted yield curve is that investors expect inflation to decrease. If the yield curve is inverted, short-term bonds have lower yields than long-term bonds. Inverted yield curves can exist for Treasury bonds, but because of default premiums, the corporate yield curve can never be inverted.

Explanation / Answer

Option c) in the above statements is true.Lower inflation in future means that investing in longer term bonds is more attractive as compared to short term bonds.Thus yield required to induce them to buy a long term bonds would be a smaller value than the yield required to induce them towards short term bonds.Hence the yield on long term bonds falls while that on short term bonds rises.Thus we get an inverted yield curve.

Related Questions

Navigate

• Browse (All)
• Browse W
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.