Detailed Answer
Answer (A) is correct. Historically, one facet of the term structure of interest rates (the relationship of yield and time to maturity) is that short-term interest rates have ordinarily been
lower than long-term rates. One reason is that less risk is involved in the short run. Moreover, future expectations concerning interest rates affect the term structure. Most economists believe that a long-term interest rate is an average of future expected short-term interest rates. For this reason, the yield curve will slope upward if future rates are expected to rise, downward if interest rates are anticipated to fall, and remain flat if investors think the rate is stable. Future inflation is incorporated into this relationship. Another consideration is liquidity preference: Investors in an uncertain world will accept lower rates on short-term investments because of their greater liquidity, whereas business debtors often prefer to pay higher rates on long-term debt to avoid the hazards of short-term maturities.
