The term structure of interest rates may be downward sloping if:

Question

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The term structure of interest rates is determined by the combination of various factors, which include the expected inflation rate, real interest rate, and interest rate risk premium. If the inﬂation premium decreases with maturity, then the yield on longer-term bonds would be lower than the yield on shorter-term bonds, leading to a downward sloping yield curve. This occurs because investors are willing to accept a lower yield on longer-term bonds since they expect lower inflation rates in the future, leading to a smaller reduction in their purchasing power over time.

The Term Structure of Interest Rates May Be Downward Sloping