Real risk-free rate-maturity risk premium is zero

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Reference no: EM131315769

Assume the following: The real risk-free rate, r*, is expected to remain constant at 3%. Inflation is expected to be 3% next year and then to be constant at 2% a year thereafter. The maturity risk premium is zero. Given this information, which of the following statements is CORRECT?

a. This problem assumed a zero maturity risk premium, but that is probably not valid in the real world.

b. The real risk-free rate cannot be constant if inflation is not expected to remain constant.

c. The yield curve for U.S. Treasury securities will be upward sloping.

d. A 5-year corporate bond must have a lower yield than a 5-year Treasury security.

e. A 5-year corporate bond must have a lower yield than a 7-year Treasury security.

Reference no: EM131315769

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