If the expectations theory of the term structure of interest rates is correct,and if the other term structure theories are invalid,and we observe a downward sloping yield curve,which of the following is a true statement?
A) Investors expect short-term rates to be constant over time.
B) Investors expect short-term rates to increase in the future.
C) Investors expect short-term rates to decrease in the future.
D) It is impossible to say unless we know whether investors require a positive or negative maturity risk premium.
E) The maturity risk premium must be positive.

Question

Quizplus · Accepted Answer

The expectations theory of the term structure of interest rates suggests that if the yield curve is downward sloping, investors expect future short-term interest rates to decrease. This is because the theory posits that long-term rates are an average of current and expected future short-term rates. If long-term rates are lower than current short-term rates (yield curve is downward sloping), it implies that investors are expecting future short-term rates to be lower than current rates.

If the Expectations Theory of the Term Structure of Interest