Consider the impact of inflation risk on the term structure of interest rates. If investors become more wary of inflation, one would expect to observe a steeper, more upwards sloping, term structure of interest rates.

Question

Quizplus · Accepted Answer

When investors become more wary of inflation, they demand higher yields to compensate for the expected loss of purchasing power caused by inflation. This causes long-term interest rates to rise more sharply than short-term interest rates, resulting in a steeper term structure of interest rates.

Consider the Impact of Inflation Risk on the Term Structure