question 15

The real risk-free rate is expected to remain constant at 3% in the future, a 2% rate of inflation is expected for the next 2 years after which inflation is expected to increase to 4%, and there is a positive maturity risk premium that increases with years to maturity. Given these conditions, which of the following statements is CORRECT? The yield on a 2 year T-bond must exceed that on a 5-year T-bond. The yield on a 5-year Treasury bond must exceed that on a 2-year Treasury bond. The yield on a 7-yeat Treasury bond must exceed that of a 5-year corporate bond. The conditions in the problem cannot all be true they are internally inconsistent The Treasury yield curve under the stated conditions would be humped rather than have a consistent positive or negative slope