Bonds for two companies were just issued: Short Corp.'s bonds will mature in 5 years, and Long Corp.'s bonds will mature in 15 years. Both bonds promise to pay a semiannual coupon, they are not callable or convertible, and they are equally liquid. Further, assume that the Treasury yield curve is based only on expectations about future inflation, i.e., that the maturity risk premium is zero for T-bonds. Under these conditions, which of the following statements is correct?
A. If the Treasury yield curve is downward sloping, Long's bonds must under all conditions have the lower yield.
B. If the yield curve for Treasury securities is upward sloping, Long's bonds must under all conditions have a higher yield than Short's bonds.
C. If the yield curve for Treasury securities is flat, Short's bond must under all conditions have the same yield as Long's bonds.
D. If Long's and Short's bonds have the same default risk, their yields must under all conditions be equal.
E. If the Treasury yield curve is upward sloping and Short has less default risk than Long, then Short's bonds must under all conditions have the lower yield.
Answer: E
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