Why is The Slope of Yield Curve Upward?

Personalized homework help to elevate your understanding and boost your grades. Dive into a world where learning becomes easy, and complex topics transform into simple solutions.
  • 24/7 Assistance
  • Expert Tutors
  • Guaranteed Results

Let us take an example to understand this. Say, in case of a two-year investment, the rate of interest for the first year is 5% and it is 10% for the second year. The forward rate will be equivalent to 15.24%. Now, two explanations can be given:

  1. The 1-year rate of interest will be higher in the next year. The 1-year rate of interest in the next year might even be higher than 15.24%.
  2. Investors earn high rates of return by holding long-term bonds than by holding short-term bonds. If the yield curve does not have an upward slope, then the value of interest the next year will be lower.

Let us know study whether higher present rates of interest will ensure higher rates of interest in the future.


Generally, when inflates is high, the nominal interest rates are bound to go higher and vice-versa.

The upward slope of the yield-curve can be explained in terms of inflation. Say, the rates of interest are high in the upcoming future but there is also a probability of inflation.

Since 1997, Treasury has been selling bonds that are inflation-indexed. They promise to pay the interest rate plus the promised CPI inflation rate. These are known as Treasury Inflation Protected Securities (TIPS). They are sometimes also known as CPI bonds. These are not affected by inflation. Even if the nominal yield curve is upward sloping due to high rates of inflation, the yield curve of TIPS does not have an upward slope.

The scenario of the Treasury in December 2004 is depicted below:

Why is The Slope of Yield Curve Upward? 17 Here the TIPS yield curve is upward sloping. So, we can say that higher future expected inflation rates are not the only reason why yield curves are upward sloping.

The implied interest rate, when calculated, comes out to be:

Why is The Slope of Yield Curve Upward? 18

In 2004, it could have been said that a 3-basis point would be the reason for inflation from 2014 to 2024. Higher inflation rates might have a role to play in future.


  1. A 30-year inflation adjusted bond offers a real yield of 3.375% per year. Given the current inflation rate of 1.6% per year, a 30-year bond offering a nominal yield of 5.6% per year, but it is not inflation adjusted. Which one will you buy and buy?


As short term rates will be higher in future, therefore, yield-curves are upward sloping. It is predicted that in future, capital will be scarce but investment opportunities will be better and this will lead to a higher interest rate.

Unfortunately, though, future inflation rates can be estimated but there is no way to estimate future interest rate.


Long term bonds yielded more than short term bonds. But, long term bonds are riskier than short-term bonds and therefore, they need to offer more return on average so that investors choose the long term bonds. This is the only way by which the risk factor can be compensated.

Links of Previous Main Topic:-

Links of Next Financial Accounting Topics:-

Download Our Solved Homework Solutions 📚

Curious about the level of quality we deliver? Navigate through our carefully curated selection of solved assignments, neatly organized by subject and level. This is a great way to get a feel for our service before you submit your own assignments.

Go ahead, download, review, and let us help you excel! 🚀

Accounting Homework

Corporate Accounting Sample

Biology Homework

Genetics Assignment Sample

Essay Writing Help

Business Plan Homework Sample

Statistics Homework

SPSS Assignment Sample

Score High with Our Experts

At MyHomeworkHelp, our experts are alumni from world-class universities and colleges. Each candidate undergoes a stringent check of their academic prowess and professional history before joining us as expert.

Hear It From Our Students

Real stories from students who’ve experienced our high-quality assistance. Discover how we’ve helped them excel!

Got Questions? We’ve Got Answers

How do I submit my homework?
Click on the "Get Help Now🚀" button at the top of our website. Fill in the required details about your assignment and our team will get back to you within 15 minutes with a free quote.
Is there a guarantee on the quality of work?
Absolutely! We ensure top-quality assistance. If you're unsatisfied with the results, we offer revisions and a money-back guarantee based on certain conditions.
How quickly can I expect my completed assignment?
Our experts work diligently to meet your deadlines. Depending on the complexity, we usually deliver assignments within the stipulated time mentioned in the quote.
Who are the experts assisting me?
Our team comprises professionals with academic expertise in various fields. Each expert is thoroughly vetted and has a track record of delivering excellence.
What if I need revisions?
Your satisfaction is our priority. If you need any revisions, contact us with the specific changes, and our experts will address them promptly.
How do you ensure the privacy of my information?
We take privacy seriously. All your data is encrypted and we follow strict confidentiality protocols. Your personal and assignment details will never be shared with third parties.