medium · Debt Capital Markets
Why does an upward-sloping yield curve imply that forward rates are higher than current spot rates?
- Forward rates represent the actual cost of borrowing in the secondary market today.
- Each forward rate must 'pull' the average (spot) rate upward to maintain the positive slope.
- Forward rates include a liquidity premium that spot rates do not incorporate.
- Investors expect interest rates to fall in the future, increasing the demand for long-term bonds.
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