Based on expectations theory, the term structure of interest rates will be ________ anytime investors believe that interest rates will be higher in the future than they are today.
A)volatile
B)flat
C)downward sloping
D)upward sloping
E)vertical

Question

Quizplus · Accepted Answer

Per expectations theory, if investors expect interest rates to rise in the future, they will demand a higher yield for longer-term bonds to compensate them for the risk of holding those bonds until maturity. This higher demand for longer-term bonds will push up their prices, which will, in turn, lower their yields. As a result, the yield curve will slope upward, reflecting the expectation of higher interest rates in the future.

Based on Expectations Theory, the Term Structure of Interest Rates