Question

Why does my teachers notes say you get a higher return on a long term security because they have higher interest rates than short term securities but on the bottom section by the descending curve she put that short term securities have higher interest rate than long term? Please explain again to me are interest rates higher in inflation and lower in deflation

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Answer 1

Ans

No he is not at all saying one is higher than other

Actually he is saying when long term interest rates are expected to be higher than short term rates yield curve is upward sloping. This happens quite often and is normal

But sometimes longterm rates are expected to be lower than short term rates. This is more likely in case of recession when there is pessimism.in this case yield curves will be inverted. This happens rarely