Question

When referring to a "downward sloping" yield curve:

as maturities shorten, interest rates decline

as maturities shorten, interest rates rise

as maturities lengthen, interest rates remain the same

as maturities lengthen, interest rates rise

Answer 1

Answer is as maturities shorten, interest rates rise.

The resason is that downward sloping yield curve indicates the lower rates. When the maturities lenghten, interest rates decrease and vice versa. It means when the maturities shorten, interest rate rise as the yield curve is sloping downward. On contrary, upward yield curve indicate the high yield with higher maturities. This is because long-term bonds are exposed to more risk like changes in interest rates. Thus, higher yield is compensation for more risk in upward sloping curve.