Understanding the Yield Curve in Economic Growth

Very Easy Term Structure Dynamics Yield Curve Construction

A fixed income analyst is studying the yield curve, which represents the relationship between interest rates and the time to maturity of debt securities.

The analyst wants to understand how different factors can affect the shape of the yield curve. One of the most fundamental concepts is the structure of interest rates and how they are reflected in various maturities. It is generally visible that while some maturities offer higher yields, others may offer lower yields, and this can lead to different profiles such as normal, inverted, or flat yield curves.

Based on your understanding of yield curve construction, which of the following best describes the typical yield curve when the economy is expected to grow?

The yield curve slopes downward, indicating short-term rates are higher than long-term rates.

The yield curve is flat, indicating that short-term and long-term rates are the same.

The yield curve slopes upward, indicating that long-term rates are higher than short-term rates.

Hint

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