Question

Which of the following explains how can a yield curve be flat or downward sloping if a maturity risk premium exists? a. Investors expect inflation to be higher in the future. b. Investors expect inflation to be lower in the future. c. Investors expect inflation to remain the same in the future. d. Investores expect the real rate of interest to rise in the future.

Answer 1

"Investors expect inflation to be lower in the future" explains how can a yield curve be flat or downward sloping if a maturity risk premium exists.

Answer: Option B

Explanation:

Yield curves monitor the connection of interest rates to the treasury securities of US maturity in a given time. With interest rate changes, the slope, shape, and scale of yield curves can vary over time. The gradient of the yield curve offers a good indication of the path of future short-term interest rates; an upward sloping curve usually suggests that higher future interest rates are expected by financial markets; a downward sloping curve implies perceptions of lower future rates.