Assume the yield curve is flat. If investors flood the short-term market and avoid the long-term market, they may cause the yield curve to
A) remain flat.
B) become upward sloping.
C) become downward sloping.
D) none of the above

Question

Quizplus · Accepted Answer

If investors flood the short-term market and avoid the long-term market, this would increase demand for short-term bonds, leading to a decrease in short-term yields. However, without a corresponding increase in demand for long-term bonds, long-term yields would remain unchanged. This would result in a steeper yield curve, or an upward sloping curve.

Assume the Yield Curve Is Flat