313.12
12. Give and explain two reasons why the yield curve normally slopes upward. (6)
Any 2 of the following 3 are acceptable:Interest rates are expected to rise in the future due to economic conditions and supply and demand of credit.
There is greater risk in entering into longer-term loans, so suppliers of credit require a premium in the form of higher rates for longer maturities. (a variant is that there is greater liquidity in short-term loans, so suppliers of credit require a premium to create long-term loans)
There are more people willing to lend for shorter amounts of time and more companies/people looking to borrow for longer amounts of time, so the supply and demand imbalance leads to lower rates on short maturities and higher rates on long maturities.