CFA Practice Question

CFA Practice Question

The required rate of return on a bond with a 5-year maturity typically would be ______ that on an otherwise identical bond with a 10-year maturity.
A. the same as
B. higher than
C. lower than
Explanation: The yield curve typically slopes upward because investors expect future short-term rates to be above current short-term rates. Remember, yield-to-maturity is on the Y-axis and years-to-maturity is on the X-axis. This upward slope means that the rate of return will generally be higher on bonds with longer maturities, other things being equal. To put this into perspective, an investor with funds committed for five years is not assuming as much risk (potential loss of market interest rate return) as an investor with funds committed for ten years.

User Contributed Comments 1

User Comment
mekc liquidity premium, also present on inverted yield curve
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