An upward-sloping term structure of interest rates indicates:

• A. Interest rates are expected to decrease in the future.
• B. Short-term interest rates are higher than long-term interest rates.
• C. Long-term interest rates are higher than short-term interest rates.
• D. There is no relationship between short-term and long-term interest rates.

Answer: (C)

Verified step by step guidance

1. Understand the term 'term structure of interest rates,' which refers to the relationship between interest rates (or yields) of bonds with different maturities but similar credit quality.
2. Recognize that an 'upward-sloping' term structure means that interest rates increase as the maturity lengthens; in other words, long-term interest rates are higher than short-term interest rates.
3. Recall that this shape often reflects expectations of rising future interest rates or compensation for risks associated with longer maturities, such as inflation or uncertainty.
4. Analyze each option by comparing it to the definition: if the term structure is upward-sloping, then short-term rates cannot be higher than long-term rates, and interest rates are not expected to decrease in the future.
5. Conclude that the correct interpretation is that long-term interest rates are higher than short-term interest rates, which matches the characteristic of an upward-sloping term structure.