An upward-sloping yield curve that indicates cheaper short-term borrowing costs than long-term borrowing costs is called as ________.
A) normal yield curve
B) inverted yield curve
C) flat yield curve
D) lognormal yield curve

Question

Quizplus · Accepted Answer

A normal yield curve is characterized by higher yields for longer-term bonds and lower yields for shorter-term bonds. This indicates that investors expect higher inflation and higher interest rates in the future. Therefore, long-term bond investors demand higher yields to compensate for the risk of inflation eroding their returns. Short-term bond investors, on the other hand, face lower inflation risk and therefore demand lower yields.

An Upward-Sloping Yield Curve That Indicates Cheaper Short-Term Borrowing Costs