A bond trader observes the following information: The Treasury yield curve is downward sloping. Empirical data indicate that a positive maturity risk premium applies to both Treasury and corporate bonds. 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, compare 5-year corporate bond and a 10-year Treasury bond. Please explain briefly which of these bonds must have a higher yield.
A bond trader observes the following information: The Treasury yield curve is downward sloping. Empirical data indicate that a positive maturity risk premium applies to both Treasury and corporate bonds. 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, compare 5-year corporate bond and a 10-year Treasury bond. Please explain briefly which of these bonds must have a higher yield.
Chapter6: Fixed-income Securities: Characteristics And Valuation
Section: Chapter Questions
Problem 15QTD
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A bond trader observes the following information:
The Treasury yield curve is downward sloping.
Empirical data indicate that a positive maturity risk premium applies to both Treasury and corporate bonds.
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, compare 5-year corporate bond and a 10-year Treasury bond. Please explain briefly which of these bonds must have a higher yield.
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