Question

If investors expect inflation to increase over the next 20 years and the maturity risk premium is expected to increase over the next 5 years. What would the general yield curve look like? Assume all other factors that impact interest are expected to be determinate (i.e. not change).

Answer 1

Answer: normal /upward sloping

Explanation:

The yield curve is a curve that shows the relationship that exist between interest rate and time to maturity. According to the expectation theory, it is stated that the yield curve will be upward sloping when there's increase in inflationary expectations.

The slope of the yield curve helps in giving a clue to know the direction of future interest rates. It should be noted that an upward sloping curve means that there is an expectation of higher interest rates in the future.

Therefore, when investors expect inflation to increase over the next 20 years and the maturity risk premium to increase over the next 5 years, the general yield curve will be upward sloping.