Which statement about the yield curve is correct?

• A. It is a plot of expected inflation
• B. It maps exchange rates by maturity
• C. It shows interest rates by maturity and its slope signals market expectations, influencing pricing
• D. It has no relation to investment valuations

Answer: (C)

The yield curve plots yields across different maturities for bonds with the same credit risk, usually government debt. It’s not a chart of expected inflation, nor a map of exchange rates. The important point is that the slope of this curve reflects market expectations about future interest rates and economic conditions. A steeper or rising curve suggests investors expect higher rates in the future, which in turn affects how we price longer‑term cash flows. Because many investment valuations, including bond pricing and discounting of future cash flows, rely on the appropriate discount rates by maturity, the shape of the yield curve directly influences pricing decisions.