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Chapter 6 - Chapter 6 1 Assume that interest rates on...

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Chapter 6 1 . Assume that interest rates on 20-year Treasury and corporate bonds are as follows: T-bond = 7.72% AAA = 8.72% A = 9.64% BBB = 10.18% The differences in these rates were probably caused primarily by: a. Tax effects. b. Default risk differences. c. Maturity risk differences. d. Inflation differences. e. Real risk-free rate differences b 2 . A bond trader observes the following information: The Treasury yield curve is downward sloping . Empirical data indicate that a positive maturity risk premium applies to both Treasury and corporate bonds. Empirical data also indicate that there is no liquidity premium for Treasury securities but that a positive liquidity premium is built into corporate bond yields. On the basis of this information, which of the following statements is most CORRECT? a. A 10-year corporate bond must have a higher yield than a 5-year Treasury bond. b. A 10-year Treasury bond must have a higher yield than a 10-year corporate bond. c. A 5-year corporate bond must have a higher yield than a 10-year Treasury bond.
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