The presence of a term spread that is usually positive indicates that:
A) the yield curve always slopes upward.
B) bonds of similar risk but with different maturities are not perfect substitutes.
C) we should expect the yield curve to usually be flat.
D) we should expect the yield curve to usually slope downward.

Question

Quizplus · Accepted Answer

A term spread that is usually positive indicates that bonds of similar risk but with different maturities are not perfect substitutes. This is because investors demand a higher yield for longer-term bonds to compensate for the additional risk of holding them for a longer period of time. This results in a positive term spread, where long-term yields are higher than short-term yields. It does not necessarily indicate that the yield curve always slopes upward or that it should be flat or downward.

The Presence of a Term Spread That Is Usually Positive