If the Treasury yield curve is downward sloping, how should the yield to maturit
ID: 2787139 • Letter: I
Question
If the Treasury yield curve is downward sloping, how should the yield to maturity on a 20-year Treasury coupon bond compare to that on a 5-year Treasury coupon bond?
It is impossible to tell without knowing the relative risks of the two securities.
The yield on a 20-year bond would be less than that on a 5-year bond.
The yield on a 20-year bond would have to be higher than that on a 5 year bond 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.
Explanation / Answer
B.The yield on a 20-year bond would be less than that on a 5-year bond.
(since the treasury yield curve is down ward sloping, it is implied that yield on a farther period will be less than the yield of immediate periods).
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