Answered: the pure expectations theory of the…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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If the pure expectations theory of the term structure is correct, which of the following statements would be CORRECT?

a. If a 1-year Treasury bill has a yield to maturity of 7% and a 2-year Treasury bill has a yield to maturity of 8%, this would imply the market believes that 1-year rates will be 7.5% one year from now.

b. The yield on a 5-year corporate bond should always exceed the yield on a 3-year Treasury bond.

c. Interest rate (price) risk is higher on long-term bonds, but reinvestment rate risk is higher on short-term bonds.

d. An upward-sloping yield curve would imply that interest rates are expected to be lower in the future.

e. Interest rate (price) risk is higher on short-term bonds, but reinvestment rate risk is higher on long-term bonds

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