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Question
Which of the following statements is most correct?
a. The maturity premiums embedded in the interest rates on U.S. Treasury securities are due primarily to the fact that the probability of default is higher on long-term bonds than on short-term bonds.
b. Reinvestment rate risk is lower, other things held constant, on 30-day T-bills than on 30-year T-bonds.
c. According to the market segmentation theory of the term structure of interest rates, we should normally expect the yield curve to have an upward slope.
d. The expectations theory of the term structure of interest rates states that borrowers generally prefer to borrow on a long-term basis while savers generally prefer to lend on a short-term basis, and that as a result, the yield curve is normally upward sloping.
e. If the maturity risk premium were zero and the rate of inflation were expected to increase in the future, then the yield curve for U.S. Treasury securities would, other things held constant, have an upward slope.
Answer
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