If expectation theory holds then:
A) a flat yield curve is an indication that long-run rates are expected to increase.
B) investors must be offered a higher expected return to hold a bond longer
C) the yield curve cannot be downward sloping
D) then an upward sloping yield curve is an indication that short-term rates are expected to increase.

Question

Quizplus · Accepted Answer

Expectation theory suggests that an upward sloping yield curve indicates that investors expect future short-term interest rates to increase. This is because the theory posits that long-term interest rates are an average of current and expected future short-term rates.

If Expectation Theory Holds Then