An inverted term structure occurs
A) when the term premium is calculated as one divided by the difference between long-term and short-term interest rates.
B) when the term premium is negative.
C) when the term premium is positive.
D) when the difference between stock returns and short-term interest rates is negative.

Question

Quizplus · Accepted Answer

An inverted term structure occurs when the term premium is negative, indicating that long-term interest rates are lower than short-term rates, which is contrary to the normal expectation that long-term rates are higher due to the increased risk over time.

An Inverted Term Structure Occurs