What typically characterizes a yield curve?

A yield curve is a graphical representation that shows the relationship between interest rates (or yields) and different maturities of debt securities. Typically, when we refer to a yield curve that slopes upward, it conveys that longer-term securities tend to offer higher yields than shorter-term ones. This phenomenon can be attributed to several factors, including the increased risks associated with longer durations, such as inflation and interest rate fluctuations. Investors generally expect a premium for locking their money away for an extended period, which is why yields increase with maturity.

In an upward-sloping yield curve, the increase in yield reflects the time value of money and investor expectations about future economic conditions. This shape is commonly observed in a healthy, growing economy, where investors demand higher returns for longer commitments, anticipating inflation and interest hikes over time.

A flat slope, downward slope, or horizontal line would indicate various market conditions but do not typically align with the most common characteristics of the yield curve in a normal economic environment. Therefore, the choice indicating an upward slope accurately represents how yields traditionally behave relative to bond maturities.