Consider the expectations theory of the term structure of interest rates. If the yield curve is downward-sloping, this indicates that investors expect short-term interest rates to ________ in the future.

Question

Quizplus · Accepted Answer

The expectations theory implies that the shape of the yield curve reflects market expectations of future interest rates. An inverted yield curve indicates that investors expect short-term rates to decrease in the future, which prompts them to invest in longer-term bonds with higher yields.

Consider the Expectations Theory of the Term Structure of Interest