Assume that annualized yields of short-term and long-term securities are equal. If investors suddenly believe interest rates will increase, their actions may cause the yield curve to
A)become inverted.
B)become flat.
C)become upward sloping.
D)be unaffected.

Question

Quizplus · Accepted Answer

When investors expect interest rates to increase, they typically shift their preference towards short-term securities to avoid being locked into lower rates for a long time. This increased demand for short-term securities lowers their yields, while the yields on long-term securities rise due to decreased demand. Consequently, the yield curve becomes upward sloping, reflecting higher yields for longer maturities.

Assume That Annualized Yields of Short-Term and Long-Term Securities Are