A "normal" term structure of interest rates would depict
A) short-term rates are higher than long-term rates.
B) long-term rates are higher than short-term rates.
C) no general relationship between short- and long-term rates.
D) intermediate rates (one to five years) are lower than both the short-term and long-term rates.

Question

Quizplus · Accepted Answer

A "normal" term structure of interest rates is one where long-term rates are higher than short-term rates. This is because investors demand higher compensation for lending money over a longer period of time, due to the increased risk of inflation and default. This pattern is often referred to as an upward-sloping yield curve.

A "Normal" Term Structure of Interest Rates Would Depict