Which of the following describes the term structure of interest rates?

The term structure of interest rates describes the relationship between bond yields and their maturities. It reflects how interest rates vary across different terms to maturity, illustrating how investors require different yields based on the length of time until a bond's principal is repaid. This concept is crucial because it helps investors assess the risk and return associated with bonds of varying maturities, which can fluctuate due to economic conditions, expectations about future interest rates, and other market factors.

Understanding the term structure allows investors to make informed decisions about bond investments and the timing of those investments. A normal upward-sloping yield curve indicates that longer-term bonds typically yield higher rates than shorter-term bonds, reflecting the increased risk over time. Conversely, an inverted yield curve, where short-term rates exceed long-term rates, can signal economic uncertainty or a potential recession.

Other options do not specifically pertain to the term structure of interest rates. For instance, the relationship between inflation rates and bond prices primarily deals with how inflation expectations affect the nominal yields of bonds rather than the correlation of yield and maturity. Similarly, the relationship between stock prices and interest rates involves a different financial aspect, focusing on equity markets, while the relationship between currency values and exchange rates pertains to foreign exchange dynamics rather than interest rates.