If the forward rate curve is downward sloping, then
A) The zero-coupon curve will lie above the yield curve.
B) The zero-coupon curve will lie below the yield curve.
C) The zero-coupon curve will lie above the yield curve in the near maturities and then lie below the yield curve for later maturities.
D) Not enough information to be able to answer the question.

Question

If the forward rate curve is downward sloping, then 
A) The zero-coupon curve will lie above the yield curve.
B) The zero-coupon curve will lie below the yield curve.
C) The zero-coupon curve will lie above the yield curve in the near maturities and then lie below the yield curve for later maturities.
D) Not enough information to be able to answer the question.

Quizplus · Accepted Answer

An downward sloping forward rate curve indicates that the market expects interest rates to decline in the future. This implies that long-term bonds will have lower yields than short-term bonds. Therefore, the zero-coupon curve will lie below the yield curve, as zero-coupon bonds with longer maturities will have lower yields than those with shorter maturities.

If the Forward Rate Curve Is Downward Sloping, Then