Final answer:
An upward-sloping term structure of interest rates usually means investors anticipate higher nominal rates on long-term bonds. This is due to expectations of higher future inflation, a higher risk over longer periods, or both. The real interest rate is the nominal rate less the inflation rate, thus affecting interest payments and economic conditions.
Step-by-step explanation:
An upward-sloping term structure of interest rates indicates that the nominal rate of interest is expected to be higher on long-term bonds as compared to short-term bonds. This can reflect expectations of higher future inflation, a premium for longer-term investments due to increased risk, or a combination of both factors.
It is important to remember that the real interest rate is calculated as the nominal interest rate minus the rate of inflation. Therefore, if the nominal rate remains high with inflation stable, the real rate would also tend to increase with maturity.
An upward-sloping term structure does not necessarily indicate an indirect relationship between nominal interest rates and time to maturity; rather, it suggests that as maturity increases, investors require a higher interest rate to compensate for the risks associated with a longer-term investment.
If the real rate were constant and the nominal rate increased, this would likely reflect an expectation of rising inflation.
Therefore, the correct answer is 1) the real rate of return is lower for short-term bonds than for long-term bonds.