Which of the following statements best describes the yield curve?

Question

Quizplus · Accepted Answer

The yield curve reflects the relationship between interest rates and the maturity of bonds. If expected inflation is higher in the future, investors will demand higher yields on longer-term bonds to compensate for the loss of purchasing power from inflation. This leads to an upward sloping yield curve. The MRP can also impact the slope of the yield curve, as it reflects the additional compensation investors require for holding longer-term bonds that are subject to greater interest rate risk. If MRP is greater than zero, the yield curve will be upward sloping. Therefore, option A best describes the relationship between inflation expectations, MRP, and the yield curve. Option B is incorrect because the yield curve can have a flat or downward slope even when MRP is greater than zero. Option C is incorrect because the yield curve can still slope upwards or downwards even when MRP is zero. Option D is incorrect because the yield curve can be downward sloping, indicating that short-term interest rates are higher than long-term interest rates.

Which of the Following Statements Best Describes the Yield Curve