Exam ICWIM Topic 1 Question 103 Discussion

Actual exam question for CISI's ICWIM exam
Question #: 103
Topic #: 1

In normal market circumstances, the yield curve slopes upward. Why is this?

A. Longer-dated bonds are generally more sensitive to interest rate changes than short-dated bonds because holders are exposed to risk for a longer period B. As long as the interest being paid on the government bond is near to the interest rate available on the market, there is little risk that the resale value will be significantly different from the purchase price C. The longer an investor ties up capital, the higher the rate of interest they will demand to compensate themselves for the greater risk and opportunity cost on the capital they have invested D. Although bonds are generally less risky than equities, their prices are intrinsically linked to the general level of interest rates and expectations of future changes

Suggested Answer: C Vote an answer

The yield curve typically slopes upward because long-term bonds have higher yields than short-term bonds.
* Why is Option C Correct?
* Investors require a higher return (yield) for longer-maturity bonds due to:
* Greater risk exposure (inflation, interest rate changes).
* Opportunity cost (capital is locked up for a longer period).
* This creates an upward-sloping yield curve.
* Why Not Other Options?
* A (Interest rate sensitivity) # While true, it does not explain why the curve slopes upwards.
* B (Resale value risk) # Not a key factor in yield curve structure.
* D (Bond-equity risk comparison) # Bonds react to interest rate expectations, but this does not cause the yield curve slope.
# Reference: CFA Institute (Fixed Income Markets), CISI Wealth & Investment Management.

by Chad at Oct 23, 2025, 05:27 AM

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