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Question
Which of the following statements is correct?
a. If different markets existed for long-term and short-term bonds, but lenders and borrowers could move freely between markets, (1) the market segmentation theory could not really be an important determinant of the yield curve, and (2) maturity risk premiums could not be significant.
b. Because the default risk premium (DRP) and the liquidity premium (LP) are both essentially zero for U.S. Treasury securities, the Treasury yield curve is influenced more heavily by expected inflation than corporate bonds' yield curves, i.e., we can be sure that a given amount of expected inflation will have more effect on the slope of the Treasury yield curve than on the corporate yield curve.
c. According to the market segmentation theory, investors prefer to buy debt with short maturities. Therefore, the fundamental conclusion from this theory is that the yield curve normally should slope upwards.
d. It is theoretically possible for the yield curve to have a downward slope, and there have been times when such a slope existed. That situation was probably caused by investors' liquidity preferences, i.e., by the factors which underlie the liquidity preference theory.
e. Yield curves for government and corporate bonds can be constructed from data that exist in the marketplace. If the yield curves for several companies were plotted on a graph, along with the yield curve for U.S. Treasury securities, the company with the largest total of DRP plus LP would have the highest yield curve.
Answer
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