Question

Pick the false statement from below. Multiple Choice Expectations of lower inflation rates in the future tend to lower the slope of the term structure of interest rates. The term structure of interest rates includes both an inflation premium and an interest rate risk premium. The term structure of interest rates and the time to maturity are always directly related. The real rate of return has minimal, if any, effect on the slope of the term structure of interest rates. The interest rate risk premium increases as the time to maturity increases.

Answer 1

Answer: The term structure of interest rates and the time to maturity are always directly related.

Explanation:

The term structure of interest rates shows the relationship between interest rates and the different maturity periods of bonds. Normally, these move in the same direction i.e., the higher the maturity period, the higher the interest rate.

This however is not a given. It might be expected for instance that interest rates might drop in future. In such a situation, the interest might reduce with a longer maturity period which would depict an inverse relationship instead of a direct one.