Short Corp just issued bonds that will mature in 10 years, and Long Corp issued bonds that will mature in 20 years. Both bonds promise to pay a semiannual coupon, they are not callable or corvertible, and they are equally liquid. Further assume that the Treasury yield curve is based only on the pure expectations theory. Under these conditions, which of the following statements is CORRECT?
A. If the yield curve for Treasury securities is flat, Short's bond must under all conditions have the same yield as Long's bonds.
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 Long's and Short's bonds have the same default risk, their yields must under all conditions be equal.
D. 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 a lower yield than Long's bonds.
E. If the Treasury yield curve is downward sloping, Long's bonds must under all conditions have the lower yield.
Answer: D
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