Question

Assume that the current corporate bond yield curve is upward sloping, or normal. Under this condition, we could be sure that a. Long-term interest rates are more volatile than short-term rates. b. Inflation is expected to decline in the future. c. Maturity risk premiums could help to explain the yield curve's upward slope. d. The economy is not in a recession. e. Long-term bonds are a better buy than short-term bonds.

Answer 1

c. Maturity risk premiums could help to explain the yield curve's upward slope.

Step-by-step explanation:

A yield curve in Economics or Finance Is a curve that shows interest rate associated with different contract lengths for a particular debt instrument,( e.g treasury bills, corporate bonds.)

If we assume that the current corporate bond yield curve is upward slopping or normal, we can then be sure of maturity risk premiums helping to explain the yield curves upward slope because the corporate yield curve will summarize the relationship between the time in maturity of the debt and the interest that is associated with it.

Yield curve is usually upward slopping, as the time of maturity increases, so does the associated interest. The reason for this is that debts which is issued for a longer term generally carries greater risk as a result of the greater possibilities of inflation or a default in the long run, hence, investors requires higher interest rate for longer-term.

With the explanation above, maturity risk premiums will help to explain the upward slope of the current corporate bond yield curve upward slope or normal slope.