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Semenov [28]
3 years ago
11

Assume the following: The real risk-free rate, r*, is expected to remain constant at 3%. Inflation is expected to be 3% next yea

r and then to be constant at 2% a year thereafter. The maturity risk premium is zero. Given this information, which of the following statements is CORRECT? The yield curve for U.S. Treasury securities will be upward sloping.
A 5-year corporate bond must have a lower yield than a 5-year Treasury security.

A 5-year corporate bond must have a lower yield than a 7-year Treasury security.

The real risk-free rate cannot be constant if inflation is not expected to remain constant.

This problem assumed a zero maturity risk premium, but that is probably not valid in the real world.
Business
1 answer:
DaniilM [7]3 years ago
7 0

Answer:

This problem assumed a zero maturity risk premium, but that is probably not valid in the real world.

Explanation:

Consider the following definition

Maturity risk premium determines a bond’s price. Other risks include the chance that the bond issuer will fail to make its payments and the risk that you won’t be able to quickly find a buyer for the bond when you want to sell it, forcing you to lower your asking price.

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Answer:

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The above is true due to the fact that the consumption of goods increases. This could have been reduced had it been that, there was never any excise subsidy on those goods.

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