Bond A and Bond B are zero-coupon bonds issued by the same government. Bond A is...

Bond A and Bond B are zero-coupon bonds issued by the same government. Bond A is due to mature in exactly t years from today, and Bond B is due to maturity in exactly T years from today (t<T). If the zero rate curve (for the government bonds) is downward sloping, which of the following statements is correct?

A. Since there two bonds are issued by the same government, the yield of Bond A is the same as the yield of Bond B

B. The yield on A is smaller than the yield on B

C. The yield on B is smaller than the yield on A

D. Not enough information to judge whet

her the yield of Bond A is larger or smaller than the yield if Bond B

Solutions

Expert Solution

A down-sloped yield curve indicates an expectation of lower rates in the future, which is yields on longer-term bonds, may continue to fall, corresponding to periods of economic recession. a downward sloping .

Bond A is due to mature in exactly t years from today, and Bond B is due to maturity in exactly T years from today (t<T).

Maturity of Bond B is greater than maturity of Bond A. Hence, the yield on B is smaller than the yield on A.

jeff jeffy answered 1 year ago

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