Question

A "normal" term structure of interest rates would depict

A. short-term rates higher than long-term rates.

B. long-term rates higher than short-term rates.

C. no general relationship between short- and long-term rates.

D. intermediate rates (one to five years) lower than both short-term and long-term rates.

Answer 1

A 'normal' term structure of interest rates would depict long-term rates higher than short-term rates. This pattern is generally observed in financial markets and reflects the expectations of future economic conditions and risks.

Step-by-step explanation:

A 'normal' term structure of interest rates would depict long-term rates higher than short-term rates. This means that the interest rates for loans or investments with longer maturities would be higher compared to those with shorter maturities.

For example, if the current short-term interest rate is 2% and the long-term interest rate is 4%, it would indicate a normal term structure of interest rates.

This pattern of long-term rates being higher than short-term rates is generally observed in financial markets and reflects the expectations of future economic conditions and risks.