Explanation:
When the yield curve is upward sloping:
This relationship exists because forward rates represent the expected future interest rates, and in an upward sloping yield curve, forward rates must be higher than current spot rates to maintain the upward slope. Coupon-bearing bonds typically have lower yields than zero-coupon bonds of the same maturity due to the reinvestment risk of coupon payments.
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Suppose that the yield curve is upward sloping. Which of the following statements is TRUE?
A
The forward rate yield curve is above the zero-coupon yield curve, which is above the coupon-bearing bond yield curve.
B
The forward rate yield curve is above the coupon-bearing bond yield curve, which is above the zero-coupon yield curve.
C
The coupon-bearing bond yield curve is above the zero-coupon yield curve, which is above the forward rate yield curve.
D
The coupon-bearing bond yield curve is above the forward rate yield curve, which is above the zero-coupon yield curve.
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