Which of the following premiums is NOT factored into the price of a long-term Treasury bond?

Question

Which of the following premiums is NOT factored into the price of a long-term Treasury​ bond?

BlackTom AI · Accepted Answer

Here is the question restated: Which of the following premiums is NOT factored into the price of a long-term Treasury bond?

Option A: A. a default risk premium
Explanation: Treasury bonds are considered essentially default-free by the government, so investors do not require a premium for default risk. In other words, the default risk premium is not factored into Treasury prices. This makes A the candidate for the correct choice.

Option B: B. an inflation risk premium
Explanation: Inflation risk premium accounts for the possibility that future inflation will differ from expectations, which affects long-term bonds. Since inflation risk affects long-term Treasuries, this premium is indeed factored into their price, so B is incorrect as the answer.

Option C: C. a real risk-free interest rate
Explanation: The real risk-free rate is the baseline return earned on a risk-free investment, adjusted for inflation expectations. It is a fundamental component of the yield, not a premium. However, the wording of the question asks for a PREMIUM, so while the real risk-free rate is not a premium, it is not something that would be labeled as a premium; this makes C a distractor rather than the premium that is not factored. The key point is that C is not a premium, but the question seeks a premium that is not priced in, which is best satisfied by A.

Option D: D. a maturity premium
Explanation: The maturity (term) premium reflects the higher expected return required by investors for holding longer maturities. This premium is indeed factored into the prices of long-term Treasuries, so D is incorrect as the answer.

In summary, the only item that is not a premium for long-term Treasuries is the default risk premium, since Treasuries carry negligible default risk. The other options describe factors that do influence long-term Treasury yields, so they would be factored in.

MCD2170 - T2 - 2025 Week 1 Post-Class Homework

Which of the following premiums is NOT factored into the price of a long-term Treasury bond?

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MCD2170 - T2 - 2025 Week 1 Post-Class Homework

Which of the following premiums is NOT factored into the price of a long-term Treasury​ bond?

View Explanation

Log in for full answers

Similar Questions

A bond will sell at a discount​ (below par​ value) if

As interest rates rise, the market price of your bond is also likely to rise.

You have purchased a bond with a ​7% annual coupon rate for ​$1,060. What will happen to the​ bond's price if market interest rates​ rise?

On January 1st, 2005, Borrower Limited sold a 10%, five-year, $100 million bond when bonds of equivalent risk and maturity were yielding 5% annually. Interest payments are made on January 1st next year. What is the Price of the Bond?

All bonds considered below have a face value of $1000. The two-year zero-coupon bond is trading at $906.86 while the two-year bond with annual coupon rate 3% is trading at $962.96. In the absence of arbitrage, what is the fair price of the one-year zero-coupon bond?

A company releases a five-year bond with a face value of​ $1000 and coupons paid semi-annually. If market interest rates imply a YTM of​ 6% p.a., which of the following annual coupon rates will cause the bond to be issued at a​ premium?

More Practical Tools for Students Powered by AI Study Helper

Making Your Study Simpler

Which of the following premiums is NOT factored into the price of a long-term Treasury bond?

A bond will sell at a discount (below par value) if

You have purchased a bond with a 7% annual coupon rate for $1,060. What will happen to the bond's price if market interest rates rise?

A company releases a five-year bond with a face value of $1000 and coupons paid semi-annually. If market interest rates imply a YTM of 6% p.a., which of the following annual coupon rates will cause the bond to be issued at a premium?