Which of the following premiums is NOT factored into the price of a long-term Treasury bond?

Question

Which of the following premiums is NOT factored into the price of a long-term Treasury​ bond?

BlackTom AI · Accepted Answer

Here is the question restated: Which of the following premiums is NOT factored into the price of a long-term Treasury bond?

Option A: A. a default risk premium
Explanation: Treasury bonds are considered essentially default-free by the government, so investors do not require a premium for default risk. In other words, the default risk premium is not factored into Treasury prices. This makes A the candidate for the correct choice.

Option B: B. an inflation risk premium
Explanation: Inflation risk premium accounts for the possibility that future inflation will differ from expectations, which affects long-term bonds. Since inflation risk affects long-term Treasuries, this premium is indeed factored into their price, so B is incorrect as the answer.

Option C: C. a real risk-free interest rate
Explanation: The real risk-free rate is the baseline return earned on a risk-free investment, adjusted for inflation expectations. It is a fundamental component of the yield, not a premium. However, the wording of the question asks for a PREMIUM, so while the real risk-free rate is not a premium, it is not something that would be labeled as a premium; this makes C a distractor rather than the premium that is not factored. The key point is that C is not a premium, but the question seeks a premium that is not priced in, which is best satisfied by A.

Option D: D. a maturity premium
Explanation: The maturity (term) premium reflects the higher expected return required by investors for holding longer maturities. This premium is indeed factored into the prices of long-term Treasuries, so D is incorrect as the answer.

In summary, the only item that is not a premium for long-term Treasuries is the default risk premium, since Treasuries carry negligible default risk. The other options describe factors that do influence long-term Treasury yields, so they would be factored in.

Which of the following premiums is NOT factored into the price of a long-term Treasury bond?Single choice

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Which of the following premiums is NOT factored into the price of a long-term Treasury​ bond?Single choice