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The real risk-free rate, r*, is expected to remain constant at 3% per year. Inflation is expected to be 2% per year forever. Assume that
- The real risk-free rate, r*, is expected to remain constant at 3% per year. Inflation is expected to be 2% per year forever. Assume that the expectations theory holds; that is, there is no maturity risk premium. Treasury securities do not require any default risk or liquidity premiums. Which of the following is most correct?
- The Treasury yield curve is flat and all Treasury securities yield 5%.
- The Treasury yield curve is upward sloping for the first 10 years, and then downward sloping.
- The yield curve for corporate bonds must be flat, but corporate bonds will yield more than 5 percent.
- Statements a and c are correct.
- Statements b and c are correct.
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