1. Assume the following: The real risk-free rate, r*, is expected to remain constant at 3%. Inflation is expected to be 3% next year and then to be constant at 2% a year thereafter. The maturity risk premium is zero. Given this information, which of the following statements is CORRECT?
Question 1 options:
1)a. The yield curve for U.S. Treasury securities will be upward sloping.
2)b. A 5-year corporate bond must have a lower yield than a 5-year Treasury security.
3)c. A 5-year corporate bond must have a lower yield than a 7-year Treasury security.
4)d. A 5-year corporate bond must have the same yield as a 7-year Treasury security
5)e. None of the above statements is correct.