Question

The theories of term structure are biased toward an upward slope, Why?

Answer 1

There is always a biased toward upward slope in the term strucuter theories due to more uncertainty of future event. Ans this uncertainty increases with the increase in the time period. Thus there is less uncertainty with shorter time period than longer time period. This uncertainty is risk and more risk signifies higher interest rate to compenste that risk.

Due to this reason term structure theories are biased towards an upward slope. Interest rate increase with longer time duration due to more risk associated with it.