Part 1What is the typical relationship between interest rates on 6-month Treasury bills, 10-year Treasury notes, and Baa corporate bonds?Part 2
A. They tend to move together over time with the corporate bond having the highest rate of interest B. All three rates are virtually exact representations of the rate of inflation C. They tend to move together over time with the 6-month Treasury bill having the highest rate of interest D. They tend to move randomly and independent of each other

Question

Part 1What is the typical relationship between interest rates on​ 6-month Treasury​ bills, 10-year Treasury​ notes, and Baa corporate​ bonds?Part 2
A. They tend to move together over time with the corporate bond having the highest rate of interest B. All three rates are virtually exact representations of the rate of inflation C. They tend to move together over time with the​ 6-month Treasury bill having the highest rate of interest D. They tend to move randomly and independent of each other

BlackTom AI · Accepted Answer

Part 1 and Part 2 of the question ask about the typical relationship among interest rates on 6-month Treasury bills, 10-year Treasury notes, and Baa corporate bonds, along with evaluating each option.
Option A: 'They tend to move together over time with the corporate bond having the highest rate of interest.' This is the best-supported statement. In practice,Treasury yields of different maturities tend to rise and fall together due to overall shifts in interest rate expectations, monetary policy, and discounting factors. Among credit risk classes, corporate bonds (even Baa) generally offer higher yields than Treasuries to compensate for credit risk, liquidity risk, and other factors. Thus, when rates move, the corporate bond yield tends to be the highest on average, with the 10-year yield and the 6-month yield following in a typical upward or downward shift, preserving a positive spread.
Option B: 'All three rates are virtually exact representations of the rate of inflation.' This is inaccurate. While inflation expectations influence nominal yields, the three rates embed other components: real rate expectations, term premiums, and credit risk premia (for corporate bonds). They are not exact representations of inflation alone.
Option C: 'They tend to move together over time with the 6-month Treasury bill having the highest rate of interest.' This is unlikely because short-term bills (6-month) usually carry lower yields than longer maturities like the 10-year note, all else equal. The highest rate is typically not the 6-month bill, especially across normal yield curves.
Option D: 'They tend to move randomly and independent of each other.' In reality, yields across maturities are linked through the yield curve and macroeconomic conditions; movements are not random or independent. Systematic shifts in policy rates, inflation expectations, and risk premia cause correlated changes across these instruments.
In summary, option A correctly captures the general pattern: the rates tend to move together over time, with corporate bonds offering the highest yield due to credit risk premia, while the Treasury yields reflect term structure and safety, and the other options misstate the relationships or imply independence that does not align with typical fixed-income behavior.

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Homework:Chapter 1 Homework

View Explanation

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In August 2021, which type of consumer loan had the HIGHEST interest rate?

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