Short Corp. just issued bonds that will mature in 15 years, and Long Corp. issued bonds that will mature in 30 years. Both bonds promise to pay an annual coupon, they are not callable or convertible, and they are equally liquid. Further, assume that the yield curve is based only on expectations about future inflation; that is, that the maturity risk premium is zero for government bonds. Under these conditions, which of the following statements is correct?
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If the yield curve is upward sloping, Short’s bonds must have the lower yield under all conditions.
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If the yield curve is downward sloping, Short’s bonds must have the higher yield under all conditions.
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If the yield curve is upward sloping and Short has higherdefault risk than Long, then Long’s bonds must have the higher yield under all conditions.
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If the yield curve is upward sloping and Short has less default risk than Long, then Long’s bonds must have the higher yield under all conditions.
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