Question

Which of the following statement completions is CORRECT? If the yield curve is upward sloping, then the marketable securities held in a firm's portfolio, assumed to be held for emergencies, should a. consist mainly of U.S. Treasury securities to minimize interest rate risk. b. consist mainly of short-term securities because they pay higher rates. c. consist mainly of short-term securities to minimize interest rate risk. d. be balanced between long- and short-term securities to minimize the adverse effects of either an upward or a downward trend in interest rates. e. consist mainly of long-term securities because they pay higher rates.

Answer 1

Answer: consist mainly of short-term securities because they pay higher rates.

Explanation:

The yield curve is a curve depicting several yields to maturity or the interest rates across several contract lengths for identical debt contract. The yield curve shows the relationship that exist between the interest rate and time to maturity,

If the yield curve is upward sloping, the marketable securities which are held in a firm's portfolio, and assumed to be held in case of emergencies will consist of short-term securities in order to reduce interest rate risk. As the yield curve is upward sloping, therefore long term securities will be expected to have higher interest rate in the future and therefore a price decline. Because the securities are in case of emergency, it is advisable to have short term securities.