The yield curve is typically _____________, meaning that the annualized interest is higher for debt securities with longer terms to maturity.
A. Upward
B. vertical
C. Downward
D. Horizontal
upward
The correct answer to the question is C. Downward.
To understand why the yield curve is typically downward, we need to understand what the term "yield curve" refers to. The yield curve is a graphical representation of the relationship between the yield (or interest rate) of debt securities and their time to maturity. It plots the yields on the vertical axis and the time to maturity on the horizontal axis.
In most cases, the yield curve slopes downward. This means that the annualized interest rate (yield) tends to be higher for debt securities with longer terms to maturity. This phenomenon is known as a "normal" or "downward-sloping" yield curve.
The reason behind this relationship is the market's expectation of future economic conditions and interest rates. In a normal economic environment, investors usually demand higher yields for longer-term investments to compensate for the risk and uncertainty associated with lending money for a longer period. Consequently, the longer the time to maturity, the higher the interest rate tends to be.
To answer the question, one must understand that the yield curve is generally downward, meaning that debt securities with longer terms to maturity have higher annualized interest rates. Therefore, the correct answer is C. Downward.