Which of the following statements relating to yield volatility is most accurate? if the term structure of yield volatility is downward sloping, then:
A) short-term rates are higher than long-term rates.
B) long-term yields are more stable than short-term yields.
C) short-term bonds will always experience greater price fluctuation than long-term bonds.

Question

Quizplus · Accepted Answer

When the term structure of yield volatility is downward sloping, it implies that market participants expect short-term rates to be more volatile than long-term rates. This is because changes in short-term rates are typically impacted more by changes in monetary policy and economic conditions, while long-term rates are influenced more by inflation expectations and other structural factors. Therefore, long-term yields are expected to be more stable than short-term yields. However, it does not necessarily mean that short-term bonds will always experience greater price fluctuation than long-term bonds, as other factors such as credit risk and liquidity can also affect bond prices.

Which of the Following Statements Relating to Yield Volatility Is