Which of the following scenarios best describes a 'normal' yield curve?

Question: Which of the following scenarios best describes a 'normal' yield curve?

Answer options:

• Short-term bond yields are higher than long-term bond yields. ✅ Long-term bond yields are higher than short-term bond yields.
• All bond yields, regardless of maturity, are approximately the same.
• The yield curve shows a sharp decline at longer maturities.

Correct answer: Long-term bond yields are higher than short-term bond yields.

Explanation: A normal yield curve slopes upward, indicating that investors demand higher compensation (yield) for taking on the additional interest rate risk associated with longer-term investments.