SIE practice questionmediumBonds — Yield Curve
A normal (upward-sloping) yield curve indicates that:
- ALong-term bonds offer higher yields than short-term bonds✓ Correct answer
- BShort-term interest rates are higher than long-term rates
- CAll bonds yield the same regardless of maturity
- DThe economy is likely heading into a recession
Explanation
Why A — Long-term bonds offer higher yields than short-term bonds
A normal yield curve slopes upward, meaning longer-term bonds pay higher yields than shorter-term bonds. This compensates investors for the additional risk of tying up money for longer periods (greater interest rate risk, inflation risk, etc.). An inverted yield curve (A) — where short-term rates exceed long-term rates — is historically associated with upcoming recessions.
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