For this question, assume that the yield curve is NOT humped.
If the 1-year yield on Government bonds is 4% and the 3-year yield on corporate bonds is 6%, which of the following statements is true?
(This is tricky. Think about what higher credit risk does to the yield on a bond.)
Select one:
a. The yield curve is normal.
b. The yield curve is flat.
c. The yield could be normal or humped.
d. It is impossible to make any comment about the shape of the yield curve from the information given.