Question

If the yield curve is upward sloping, which of the following statements is correct?

Select one:

a. The default risk premium on T-bonds decreases as years to maturity (T) increases.

b. The maturity risk premium on T-bonds decreases as years to maturity (T) increases.

c. The inflation premium on T-bonds has to increase with maturity (T).

d. The liquidity risk premium on T-bonds decreases as years to maturity (T) increases.

e. The real risk-free rate on T-bonds remains the same as years to maturity (T) increases.

Answer 1

The correct option is C

The Upward yield curve Or Normal yield curve represents that the Yield on the Longer period securities are higher than short term period securities, This represents that investors are expecting higher interest rate in the future.

In Upward sloping yield curve, The Default risk premium and Maturity risk premium increases as years to maturity increases and the Liquidity premium depends on Securities tradeability in the market.

The Inflation premium increases as the years to maturity increases because this will increase the interest rate as investor would be compensating for the inflation.