Forward interest rates tend
A) to accurately predict future spot rates because of the law of one price.
B) not to be good predictors of future spot rates.
C) to be biased downward as predictors of future spot rates when the yield curve is upward sloping.
D) to be biased upward as predictors of future spot rates when the yield curve is downward sloping.

Question

Quizplus · Accepted Answer

Forward interest rates are not always good predictors of future spot rates as they can be affected by various factors such as market liquidity, risk premiums, and supply and demand factors. While the law of one price suggests that forward rates should be accurate predictors of future spot rates, this assumption may not always hold in practice. Therefore, it can be risky to rely solely on forward interest rates as a guide for making investment decisions.

Forward Interest Rates Tend