FIN3403 Exam 2 Conceptual Questions

Short Corp just issued bonds that will mature in 10 years, and Long Corp issued bonds that will mature in 20 years. Both bonds promise to pay a semiannual coupon, they are not callable or corvertible, and they are equally liquid. Further assume that the Treasury yield curve is based only on the pure expectations theory. Under these conditions, which of the following statements is CORRECT?

If the Treasury yield curve is upward sloping and Short has less default risk than Long, then Short's bonds must under all conditions have a lower yield than Long's bonds

Assume that inflation is expected to decline steadily in the future, but that the real risk-free rate will remain constant. Which of the following statements is CORRECT?

If the pure expectation theory holds, the Treasury yield curve must be downward sloping.

Assume that the current corporate bond yield curve is upward sloping. Under this condition, then we could be sure that

Maturity risk premiums could help to explain the yield curve's upward slope.

If the pure expectations theory is correct, a downward sloping yield curve indicates that interest rates are expected to decline in the future

True

The risk that interest rates will increase, and that increase will lead to a decline in the prices of outstanding bonds, is called "interest rate risk", or "price risk"

True