What is typically true about short-term interest rates compared to long-term interest rates?

Prepare for the CPFO Debt Management Exam. Study effectively with flashcards and multiple choice questions, complete with hints and detailed explanations. Get exam-ready!

The typical relationship between short-term and long-term interest rates is that short-term rates are usually lower. This phenomenon can be attributed to several factors. Short-term loans carry less risk and uncertainty because they are paid back in a shorter time frame, which generally leads lenders to charge lower interest rates for them.

Additionally, the time value of money concept indicates that the further away a payment is, the more uncertainty there is about the future value of money; thus, long-term borrowing usually comes with higher rates to compensate lenders for that risk.

Furthermore, short-term rates are often influenced by central bank policies and current economic conditions, which can result in lower borrowing costs for shorter durations. Long-term rates, on the other hand, generally reflect expectations about future interest rates, inflation, and economic conditions over an extended period.

This relationship is also described through the yield curve, which typically slopes upwards, demonstrating that as the time to maturity increases, so too do the interest rates. Therefore, the statement that short-term rates are usually lower is consistent with prevailing economic principles.

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