Question

Explain why a yield curve is commonly upward sloping

Answer 1

Yield curve is plotted against the time to maturity in years and yield in percentage. That is to say, as time to maturity increases, the rate of yield increases.

This gives us the typical upward sloping yield curve. The reason for this upward slope is the result of the risk associated with yield of a larger time to maturity.

As the time to maturity increases, the risk also increases. This risk increases as there are chances of default on the debt and a higher likelihood of inflation. This risk must be compensated by a higher rate of yield on the debt issued leading to the upward sloping yield curve.