Question

QUESTION 15

1. Which of the following is INCORRECT regarding interest rates?

   		A positive term premium is caused in part by borrowers’ preference for long duration and lenders’ preference for short duration.
   		An inverted yield curve serves as a negative indicator for the future state of the economy.
   		Zero-coupon bonds are less sensitive to interest rate changes than coupon bonds with the same time to maturity.
   		The yield curve typically slopes upward due to a positive term premium.
   		Bonds with greater default risk typically trade at higher yield-to-maturities.

Answer 1

Answer is 3rd option.Zero-coupon bonds are less sensitive to interest rate changes than coupon bonds with the same time to maturity.

		A positive term premium is caused in part by borrowers’ preference for long duration and lenders’ preference for short duration. CORRECT
		An inverted yield curve serves as a negative indicator for the future state of the economy. CORRECT
		Zero-coupon bonds are less sensitive to interest rate changes than coupon bonds with the same time to maturity. INCORRECT. Zero-coupon bonds have higher duration compared to coupon bonds with same time to maturity and thus zero-coupon bonds are more sensitive to interest rates compared to coupon bonds with same time to expiry
		The yield curve typically slopes upward due to a positive term premium. CORRECT
		Bonds with greater default risk typically trade at higher yield-to-maturities. CORRECT