A downward sloping yield curve generally implies
A) interest rates are expected to increase in the future
B) longer-term bonds are riskier than short-term bonds
C) interest rates are expected to decline in the future
D) shorter-term bonds are less risky than longer-term bonds
E) none of the above

Question

Quizplus · Accepted Answer

A downward sloping yield curve, also known as an inverted yield curve, typically occurs when investors have a pessimistic view of the economy and expect interest rates to decline in the future. This is because long-term bonds are usually priced based on expectations of future interest rates, and an expectation of declining rates leads to higher prices and lower yields on those long-term bonds.

A Downward Sloping Yield Curve Generally Implies