Inflation is expected to increase steadily over the next 10 years, there is a positive maturity risk premium on both Treasury and corporate bonds, and the real risk-free rate of interest is expected to remain constant. Which of the following statements is CORRECT?
A. The yield on 10-year Treasury securities must exceed the yield on 7-year Treasury securities.
B. The yield on any corporate bond must exceed the yields on all Treasury bonds.
C. The yield on 7-year corporate bonds must exceed the yield on 10-year Treasury bonds.
D. The stated conditions cannot all be true - they are internally inconsistent.
E. The Treasury yield curve under the stated conditions would be humped rather than have a consistent positive or negative slope.
Answer: A
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