You observe that the yield on one-year U.S. Treasury debt is higher than the yield on...
You observe that the yield on one-year U.S. Treasury debt is higher than the yield on five-year U.S. Treasury debt. This could be the case because:
| 1. Impossible. The yield curve can never be downward sloping. |
| 2. Investors expect inflation will be decreasing. |
| 3. Investors require additional compensation since bonds with shorter maturities are always less liquid. |
| 4. The default risk-premium is decreasing. |
Homework Answers
Option 2)
This is possible when term structure of yield curve is downward sloping. This could be the case because investors expect inflation to be decreasing
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