Which of the following statements is CORRECT? • If the maturity risk premium wer

Question

Which of the following statements is CORRECT?

• If the maturity risk premium were zero and interest rates were expected to decrease in the future, then the yield curve for U.S. Treasury securities would, other things held constant, have an upward slope.
• Liquidity premiums are generally higher on Treasury than corporate bonds.
• The maturity premiums embedded in the interest rates on U.S. Treasury securities are due primarily to the fact that the probability of default is higher on long-term bonds than on short-term bonds.
• Default risk premiums are generally lower on corporate than on Treasury bonds.
• Interest risk is lower, other things held constant, on long-term than on short-term bonds
• None of the above


Please, provide VERY DETAILED explanation and take into account that there are a lot of answers on this question in the internet, but all of them are aboun Reinvestment risk, not an interest risk.

Explanation / Answer

Answer is only 1 statement:-The maturity premiums embedded in interest rates on US Treasury securities are due primarly to fact that orobabilitu of default is higher on long term bonds than on short term bonds.

The higher the maturuty the higher the interest rate risk the higher the volatility.as the bond comes close to maturity its price tends towards par value.

Liquidity premium is high for illiquid instruments , and treasury is highly liquid so will have low liquidity premium.

Default risk premium are high for corporate bonds than treasury bonds as they have high default risk.

Interest rate risk is higher on long term bonds than on short term bonds.

If interest rates decrease, yield curve will be downward sloping and not upwards sloping.

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