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Suppose that a 2% rate of inflation is expected for the next 2 years, after which inflation is expected to increase to 4% and hold
Suppose that a 2% rate of inflation is expected for the next 2 years, after which inflation is expected to increase to 4% and hold at that level until Year 6, the real risk-free rate is expected to remain constant at 3% in the future, and there is a positive maturity risk premium that increases with years to maturity. Based on these conditions, which of the following statements can we assume to be true? The yield on a 5-year Treasury bond must exceed that of a 2-year Treasury bond. The yield on a 7-year Treasury bond must exceed that of a 5-year corporate bond. The yield on a 2-year T-bond must exceed that of a 5-year T-bond. The conditions in the problem cannot all be truethey are internally inconsistent. The Treasury yield curve under the stated conditions would be humped rather than have a consistent positive or negative slope
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