Using the pure expectations approach to the determination of interest rates,what is the shape of the yield curve indicated in the following data?
(₀i₁) 9.47% per annum
(₁i₁) 8.45% per annum
(₀i₂) 8.96% per annum

Question

Quizplus · Accepted Answer

The pure expectations theory suggests that future short-term interest rates can be used to predict the shape of the yield curve. In this case, the interest rates are decreasing over time (from 9.47% to 8.45% to 8.96%), indicating that shorter-term investments have higher yields than longer-term ones, which is characteristic of an inverse yield curve.

Using the Pure Expectations Approach to the Determination of Interest