Assume that the current corporate bond yield curve is upward sloping. Under this condition, then we could be sure that
A) the economy is not in a recession.
B) long-term bonds are a better buy than short-term bonds.
C) maturity risk premiums could help to explain the yield curve's upward slope.
D) long-term interest rates are more volatile than short-term rates.
E) inflation is expected to decline in the future.

Question

Quizplus · Accepted Answer

The upward slope of the yield curve implies that long-term interest rates are higher than short-term interest rates. This may be due to the expectations of future inflation, the possibility of default, or a maturity risk premium. Since long-term bonds are riskier than short-term bonds, investors need compensation for taking on the additional risk. Hence, the maturity risk premiums help to explain the yield curve's upward slope. However, we cannot conclusively determine whether the economy is in a recession, whether long-term bonds are a better buy than short-term bonds or whether inflation is expected to decline in the future based only on the yield curve's slope.

Assume That the Current Corporate Bond Yield Curve Is Upward