According to the expectations theory, when the yield curve is rising, market participants expect
A)future long-term interest rates to rise above current short-term rates.
B)future long-term interest rates to fall below current long-term rates.
C)future short-term interest rates to rise above current short-term rates.
D)future short-term interest rates to fall below current short-term rates.

Question

Quizplus · Accepted Answer

The expectations theory suggests that if the yield curve is rising, it indicates that market participants expect future short-term interest rates to increase above the current short-term rates. This is because the yield curve, which plots the interest rates of bonds of equal credit quality but different maturity dates, reflects expectations for future interest rates. A rising yield curve suggests that investors demand higher yields for longer maturities, anticipating higher interest rates in the future.

According to the Expectations Theory, When the Yield Curve Is