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  • #16036

    The yield curve is usually upward sloping. Assess whether this means that the following statements are true or false:
    1. Investors earn a higher annualized rate of return from long-term T-bonds than short-term T-bills.

    2. Long-term T-bonds are better investments than short term T-bills.

    3. Investors are expecting higher inflation in the future than they are today.

    4. Investors who are willing to take the risk of investing in long-term bonds on average earn a higher rate of return because they are taking more risk (that in the interim bond prices fall / interest rates rise)

    #16037

    Solution

    1. Investors earn a higher annualized rate of return from long-term T-bonds than short-term – The statement is True
    2. Long-term T-bonds are better investments than short term T-bills. – The statement is True
    3. Investors are expecting higher inflation in the future than they are today. – The statement is False
    4. Investors who are willing to take the risk of investing in long-term bonds on average earn a higher rate of return because they are taking more risk (that in the interim bond prices fall / interest rates rise) – The statement is False

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