LOS 55i: Describe bow the term structure of yield volatility affects the interest rate risk of a bond.

Can anybody clarify the relationship between the yield curve and short term/long term interest rates.

I am assuming in a downward(upward) sloping yield curve that the short term (long term) rates are more variable than long term (short term) interest rates.

Also when the yield curve is flat, both short term and long term rates are the same.

Is this correct?

Yes I think that’s right. More volatility would imply a higher yield so if short-term interest rates are more volatile than long term interest rates the yield volatility curve would be downward sloping and vice versa.

But, a flat yield volatility courve does not mean that the yields are the same it means that the interest rate volatility is the same i.e. short term interest rates and long term interest rates are equally variable.