What does an upward sloping yield curve indicate?

What does an upward sloping yield curve indicate?

• A. Short-term yields are higher than long-term yields
• B. Very little variation in yields between short and long-term
• C. Long-term yields are higher than short-term yields
• D. All yields are expected to decrease

Answer: (C)

An upward sloping yield curve indicates that long-term yields are higher than short-term yields. This scenario generally reflects investor expectations about future economic conditions. When the yield curve slopes upward, it suggests that investors anticipate stronger economic growth and potentially higher inflation in the future. As a result, they demand higher yields for longer-term investments to compensate for the increased risk over time. This is based on the principle that longer-term securities typically carry more uncertainty and potential volatility; therefore, investors require a premium for holding these assets for an extended period. In contrast, if short-term yields were higher than long-term yields, it would suggest an inverted yield curve, which can be an indicator of an economic slowdown or recession. Very little variation in yields between short-and long-term securities would suggest stability in the market, while expectations of all yields decreasing would indicate a bearish outlook on the economy. These contexts highlight the significance of the upward slope, as it signals confidence in growth and the associated risks of lending and borrowing over longer horizons.

An upward sloping yield curve indicates that long-term yields are higher than short-term yields. This scenario generally reflects investor expectations about future economic conditions. When the yield curve slopes upward, it suggests that investors anticipate stronger economic growth and potentially higher inflation in the future. As a result, they demand higher yields for longer-term investments to compensate for the increased risk over time. This is based on the principle that longer-term securities typically carry more uncertainty and potential volatility; therefore, investors require a premium for holding these assets for an extended period.

In contrast, if short-term yields were higher than long-term yields, it would suggest an inverted yield curve, which can be an indicator of an economic slowdown or recession. Very little variation in yields between short-and long-term securities would suggest stability in the market, while expectations of all yields decreasing would indicate a bearish outlook on the economy. These contexts highlight the significance of the upward slope, as it signals confidence in growth and the associated risks of lending and borrowing over longer horizons.