You are having a conversation with your friend Yvonne about the upward-sloping yield curve that currently exists in the bond market. She explains this to you by saying that the upward slope to the yield curve is because the market expects future short-term interest rates to be higher than current interest rates. Her observation means that she is a proponent of the __________ theory of interest rates.

Question

Quizplus · Accepted Answer

Yvonne's observation aligns with the pure expectations theory, which suggests that the shape of the yield curve reflects market expectations for future interest rates. If the yield curve is upward sloping, it indicates that the market expects future short-term rates to be higher than current rates.

You Are Having a Conversation with Your Friend Yvonne About