Question

If the Treasury yield curve is downward sloping, how should the yield to maturity on a 13-year Treasury coupon bond compare to that on a 1-year T-bill? a. The vield on a 13-year bond would be less than that on a 1-year bill. b. The yield on a 13-year bond would have to be higher than that on a 1-year bill because of the maturity risk premium. c. It is impossible to tell without knowing the coupon rates of the bonds. d. The yields on the two securities would be equal. e. It is impossible to tell without knowing the relative risks of the two securities.

Answer 1

Option a is right

Since the treasury yield curve is downward sloping, the yields on longer term securities will be lesser than yields on shorter term securities. In the given scenario, the maturity of the 13 year treasury bond is higher and so its yield will be lesser than the 1 year bill