If investors expect slightly lower future interest rates,the yield curve generated by the liquidity premium theory is ______and the yield curve implied by the expectations theory is _______.
A)upward sloping; downward sloping
B)upward sloping; upward sloping
C)downward sloping; upward sloping
D)downward sloping; downward sloping

Question

Quizplus · Accepted Answer

The liquidity premium theory suggests an upward sloping yield curve due to the added premium for holding longer-term securities, even if future rates are expected to be lower. The expectations theory suggests a downward sloping yield curve if future rates are expected to decrease.

If Investors Expect Slightly Lower Future Interest Rates,the Yield Curve