The presence of a term spread that is usually positive indicates that:
A) The yield curve always slopes upward
B) Bonds of similar risk but with different maturities are not perfect substitutes
C) We should expect the yield curve to usually be flat
D) We should expect the yield curve to usually slope downward

Question

Quizplus · Accepted Answer

A positive term spread indicates that bonds with longer maturities have higher yields than those with shorter maturities, suggesting that investors demand a higher return to tie up their money for longer periods. This implies that bonds of similar risk but with different maturities are not perfect substitutes.

The Presence of a Term Spread That Is Usually Positive