Certified Financial Management Specialist Practice Exam

What does a humped yield curve indicate?

1. Long-term rates are higher than short and intermediate-term rates

2. Short-term rates are consistent across various maturities

3. Intermediate-term rates are higher than both short and long-term rates

4. All rates are decreasing as maturity increases

The correct answer is: Intermediate-term rates are higher than both short and long-term rates

A humped yield curve indicates that intermediate-term rates are higher than both short and long-term rates. This shape suggests that investors require a premium for holding bonds of intermediate duration compared to both short and long maturities. This pattern can arise when market conditions anticipate fluctuations in interest rates or economic variables, causing investors to perceive greater risk in intermediate-term investments. Such situations may occur in periods of economic uncertainty, where short-term rates reflect current monetary policy while long-term rates may be influenced by expectations of future growth or inflation. Understanding this concept is essential, as the shape of the yield curve can serve as a critical economic indicator, impacting investment strategies, risk assessment, and financial forecasting.