If the Treasury yield curve is downward sloping, how should the yield to maturit
ID: 2764246 • Letter: I
Question
If the Treasury yield curve is downward sloping, how should the yield to maturity on a 10-year Treasury coupon bond compare to that on a 1-year T-bill?
The yield on a 10-year bond would be less than that on a 1-year bill.
The yield on a 10-year bond would have to be higher than that on a 1-year bill because of the maturity risk premium.
It is impossible to tell without knowing the coupon rates of the bonds.
The yields on the two securities would be equal.
It is impossible to tell without knowing the relative risks of the two securities.
The yield on a 10-year bond would be less than that on a 1-year bill.
The yield on a 10-year bond would have to be higher than that on a 1-year bill because of the maturity risk premium.
It is impossible to tell without knowing the coupon rates of the bonds.
The yields on the two securities would be equal.
It is impossible to tell without knowing the relative risks of the two securities.
Explanation / Answer
The yield on a 10-year bond would be less than that on a 1-year bill.
In a normal scenario the yield curve is upward sloping which means with higher holding period higher return is observed, longer the duration higher is the risk and hence higher is the return.
But here he slope is downward sloping which means a lower yield with increasing duration
The yield on a 10-year bond would be less than that on a 1-year bill.
In a normal scenario the yield curve is upward sloping which means with higher holding period higher return is observed, longer the duration higher is the risk and hence higher is the return.
But here he slope is downward sloping which means a lower yield with increasing duration
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.