Suppose that the current yield for a 20-year Treasury bond falls below the curre

Question

Suppose that the current yield for a 20-year Treasury bond falls below the current one-year bond yield. Which of the following is true regarding the segmented markets theory of the term structure of interest rates in this case?

A. The 20-year bond yield falls below the one-year bond yield because the interest rate on the one-year bond is expected to fall in this case.

B. The one-year bond yield lies above the 20-year bond yield because investors prefer long-term bonds in this case

C. The 20-year bond yield falls below the one-year bond yield because people prefer shorter-term bonds in this case.

D. The 20-year bond yield exceeds the one-year bond yield because investors require a liquidity premium for bonds with a longer term to maturity in this case.

Explanation / Answer

Option C ia thhe correct answer

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