"A bond trader observes the following information:

1.The Treasury yield curve is downward sloping.
2. Empirical data indicate that a positive maturity risk premium applies to both Treasury and corporate bonds.
3. Empirical data also indicate that there is no liquidity premium for Treasury securities but that a positive liquidity premium is built into corporate bond yields.

On the basis of this information, which of the following statements is most CORRECT?a. A 10-year corporate bond must have a higher yield than a 5-year Treasury bond.b. A 10-year Treasury bond must have a higher yield than a 10-year corporate bond.c. A 5-year corporate bond must have a higher yield than a 10-year Treasury bond.d. The corporate yield curve must be flat.e. Since the Treasury yield curve is downward sloping, the corporate yield curve must also be downward sloping.

As per the following given statements, since the treasury security has no liquidity premium on the treasury security and on the other hand the bond has a positive liquidity premium.

Thus, the coupon bonds will have higher yield than the treasury security.

Hence, the correct statement is C that is A 5-year corporate bond must have a higher yield than a 10-year Treasury bond.

Answer Link

Mabeh Mabeh · Answer 2 · 2020-03-15T07:07:30+01:00

Answer:

the correct statement is c. A 5-year corporate bond must have a higher yield than a 10-year Treasury bond

Explanation:

because the interest rate of the corporate bond is higher than that of the treasury bond.

A Treasury bond (T-bond); is a government debt security that earns interest until maturity, at which point the owner is also paid a par amount equal to the principal.

A corporate bond: is a bond issued by a corporation in order to raise financing for a variety of reasons such as to ongoing operations, M&A, or to expand business. The term is usually applied to longer-term debt instruments, with maturity of at least one year.

Treasury bonds pay a stable interest rate at a semi-annual frequency during the 30-year term. Some corporate bonds also reward investors with interest payments. While corporate bonds are riskier than treasury bonds, they have the potential to perform better than treasury bonds due to higher interest rates.