The term structure of interest rates
A) is an indication of investors' expectations about inflation and future interest rates.
B) will be downward sloping if short-term interest rates are higher than long-term rates.
C) will be upward sloping under normal conditions.
D) All of the options are true.

Question

Quizplus · Accepted Answer

All of the options are true. The term structure of interest rates reflects investors' expectations about inflation and future interest rates. If short-term interest rates are higher than long-term rates, the term structure will be downward sloping. Under normal conditions, the term structure will be upward sloping, indicating that longer-term bonds have higher yields to compensate for the additional risk of holding them for a longer period of time.

The Term Structure of Interest Rates