Question on Bonds

Kruser6 · Sep 11, 2005

Which of the following statements is most correct?

<TABLE cellSpacing=0 cellPadding=3><TBODY><TR><TD class=opposite vAlign=top><INPUT id=webct1_309045433 onclick="register_change('1');" type=radio CHECKED value=1 name=211.res> </TD><TD vAlign=top><LABEL for=webct1_309045433>a.</LABEL></TD><TD vAlign=top><LABEL for=webct1_309045433>The yield on a 3-year Treasury bond cannot exceed the yield on a 10-year Treasury bond. </LABEL></TD></TR><TR><TD class=opposite vAlign=top><INPUT id=webct2_309045433 onclick="register_change('1');" type=radio value=2 name=211.res> </TD><TD vAlign=top><LABEL for=webct2_309045433>b.</LABEL></TD><TD vAlign=top><LABEL for=webct2_309045433>The yield on a 2-year corporate bond will always exceed the yield on a 2-year Treasury bond. </LABEL></TD></TR><TR><TD class=opposite vAlign=top><INPUT id=webct3_309045433 onclick="register_change('1');" type=radio value=3 name=211.res> </TD><TD vAlign=top><LABEL for=webct3_309045433>c.</LABEL></TD><TD vAlign=top><LABEL for=webct3_309045433>The yield on a 3-year corporate bond will always exceed the yield on a 2-year corporate bond. </LABEL></TD></TR><TR><TD class=opposite vAlign=top><INPUT id=webct4_309045433 onclick="register_change('1');" type=radio value=4 name=211.res> </TD><TD vAlign=top><LABEL for=webct4_309045433>d.</LABEL></TD><TD vAlign=top><LABEL for=webct4_309045433>Statements b and c are correct. </LABEL></TD></TR><TR><TD class=opposite vAlign=top><INPUT id=webct5_309045433 onclick="register_change('1');" type=radio value=5 name=211.res> </TD><TD vAlign=top><LABEL for=webct5_309045433>e.</LABEL></TD><TD vAlign=top><LABEL for=webct5_309045433>All of the statements above are correct</LABEL></TD></TR></TBODY></TABLE>

Anyone know?

MRPOOPS · Sep 16, 2005

Those questions are all foolish to be honest. You can have a 3 year BB Xerox bond yielding 15% and a 2 year AAA GE with a yield of 4%. Drop me a PM if you want to know about bonds.

Good Luck

Heatwave · Sep 16, 2005

I would go with B. This is due to the risk of default premium on corporates. The government will pay you. Corporates should pay you, but there are times when they don't.

It is unlikely that:

A. A 3 year treasury bond yield will exceed a 10 year. It could happen when yield curve is inverted massively, but I would say that will almost never happen. But again, it could.

It could happen that:

C. A 3 year corporate yield could exceed a 2 year yield. This all depends on the ratings of the bonds. A junky 2 year bond may have a higher yield than a 3 year investment grade corporate.

HW

heart222 · Sep 20, 2005

c would be most correct assuming the same company. a 2 yr gm bond would be a higher yield than a 3 yr ge bond. glacken is in the bond business and i have been in the business for 25+ years drop me an email if you wish. elbokas@aol.com

Dawoofdaddy · Sep 20, 2005

None Of Above

Heatwave · Sep 21, 2005

Heart,

So by what you are saying, that a 2 year GM bond yield will exceed a 3 year GE bond, which is true, then the answer cannot be C.

C states that a 3 year corporate yield WILL ALWAYS exceed a 2 year corporate yield, which you have proven to be false by your example above.

Still believe the answer is B. A treasury bond will always be of higher quality than any corporate issue with the same timeframe, and thus have a lower yield.

HW

Kruser6 · Sep 21, 2005

The correct answer is;

B; The yield on a 2-year corporate bond will always exceed the yield on a 2-year Treasury bond.

Statements A and C are both incorrect because expected interest rates can be positive, negative, or nuetral. Because of that missing information on interest rates, A and C can not be evaluated. For statement b, both bonds have the same expected inflation. A corporate bond always has some default risk premium, while the Treasury bond does not, so the yield on the 2-year corporate bond must exceed the yield on the 2-year Treasury bond.