QUESTIONS 19 THROUGH 32 RELATE TO QUANTITATIVE METHODS

19. The yield to maturity on otherwise identical option-free bonds issued by the U.S.

Treasury and a large industrial corporation is 6 percent and 8 percent,

respectively. If annual inflation is expected to remain steady at 2.5 percent over

the life of the bonds, the most likely explanation for the difference in yields is a

premium due to:

A. maturity.

B. inflation.

C. default risk.