convertible, and they are equally liquid. Further assume that the Treasury yield curve is based only on the pure expectations theory. Under these conditions, which of the following statements is CORRECT? O a. If Long's and Short's bonds have the same default risk, their yields must under all conditions be equal. O b. If the Treasury yield curve is upward sloping and Short has less default risk than Long, then Short's bonds must under all conditions have a lower yield than Long's bonds. O c. If the yield curve for Treasury securities is flat, Short's bond must under all conditions have the same yield as Long's bonds. O d. If the yield curve for Treasury securities is upward sloping, Long's bonds must under all conditions have a higher yield than Short's bonds. Oe. If the Treasury yield curve is downward sloping, Long's bonds must under all conditions have the lower yield.
convertible, and they are equally liquid. Further assume that the Treasury yield curve is based only on the pure expectations theory. Under these conditions, which of the following statements is CORRECT? O a. If Long's and Short's bonds have the same default risk, their yields must under all conditions be equal. O b. If the Treasury yield curve is upward sloping and Short has less default risk than Long, then Short's bonds must under all conditions have a lower yield than Long's bonds. O c. If the yield curve for Treasury securities is flat, Short's bond must under all conditions have the same yield as Long's bonds. O d. If the yield curve for Treasury securities is upward sloping, Long's bonds must under all conditions have a higher yield than Short's bonds. Oe. If the Treasury yield curve is downward sloping, Long's bonds must under all conditions have the lower yield.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:**Transcription for Educational Website**
**Topic: Bond Yields and Yield Curves**
**Scenario:**
Short Corp has issued bonds with a 10-year maturity, and Long Corp has issued bonds with a 20-year maturity. Both bonds offer semiannual coupon payments, and they are neither callable nor convertible; they also share equivalent liquidity. The Treasury yield curve is considered based on the pure expectations theory.
**Question:**
Given these conditions, which of the following statements is correct regarding the bond yields?
- **a.** If Long’s and Short’s bonds have the same default risk, their yields must under all conditions be equal.
- **b.** If the Treasury yield curve is upward sloping and Short has less default risk than Long, then Short's bonds must under all conditions have a lower yield than Long's bonds.
- **c.** If the yield curve for Treasury securities is flat, Short’s bond must under all conditions have the same yield as Long’s bonds.
- **d.** If the yield curve for Treasury securities is upward sloping, Long’s bonds must under all conditions have a higher yield than Short’s bonds.
- **e.** If the Treasury yield curve is downward sloping, Long’s bonds must under all conditions have the lower yield.
**Analysis:**
In assessing which statement is correct, consider the relationship between the yield curve's shape and bond yield behavior, while assuming constant default risk and liquidity levels per the conditions provided.
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