According to the expectations theory of the term structure
A)when the yield curve is steeply upward sloping,short-term interest rates are expected to remain relatively stable in the future.
B)when the yield curve is downward sloping,short-term interest rates are expected to remain relatively stable in the future.
C)investors have strong preferences for short-term relative to long-term bonds,explaining why yield curves typically slope upward.
D)yield curves should be equally likely to slope downward as slope upward.

Question

Quizplus · Accepted Answer

The expectations theory of the term structure suggests that the shape of the yield curve reflects investors' expectations about future interest rates. If investors expect future short-term rates to rise, the yield curve will slope upward; if they expect rates to fall, it will slope downward. The theory does not inherently favor upward or downward sloping curves, implying that both are equally likely depending on future interest rate expectations.

According to the Expectations Theory of the Term Structure