Question

Which of the following statements is CORRECT?

a. Inverted yield curves can exist for Treasury bonds, but because of default premiums, the corporate yield curve cannot become inverted.

b. If the yield curve is inverted, short-term bonds have lower yields than long-term bonds.

c. The most likely explanation for an inverted yield curve is that investors expect inflation to increate in the future.

d. The higher the maturity risk premium, the higher the probability that the yield curve will be inverted.

e. Even if the pure expectations theory is correct, there might at times be an inverted Treasury yield curve.

Answer 1

Option e.

Even if the pure expectations theory is correct, there might at times be an inverted Treasury yield curve.

Inverted yield curve means that the interest rate on long term bonds will be lower than the short term bonds.

With an inverted yield curve, the yield on bonds with shorter duration will be higher than the bonds with longer duration

For an inverted yield curve, investors expect the inflation rate to decrease

For an inverted yield curve, the maturity risk premium is also expected to decrease