Understanding the Yield Curve: Fixed Income Valuation

Hard Fixed Income Valuation Term Structure Of Interest Rates

Consider a theoretical market where the term structure of interest rates is represented by the following information:

- A zero-coupon bond maturing in 1 year has an implied yield of 2%.

- A zero-coupon bond maturing in 2 years has an implied yield of 3%.

- A zero-coupon bond maturing in 3 years has an implied yield of 4%.

This term structure suggests a normal upward slope. Based on this scenario, which of the following statements about the yield curve is correct?

The yield curve is flat, indicating no expectation of future rate changes.

The yield curve is inverted, suggesting that long-term rates are lower than short-term rates.

The yield curve is upward-sloping, indicating an expectation of rising interest rates in the future.

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