If the expectations theory of the term structure of interest rates is correct, a
ID: 2805108 • Letter: I
Question
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 increase in the future. B) Investors expect short-term rates to be constant over time. 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 E) The maturity risk premium must be positive. 22. risk premium.Explanation / Answer
If the expectation theory of the term structure of interest rate is correct, and if the other term structure theories are invalid, and we observed downward sloping yield curve. Yield curve is downward when short-term yield on bond is higher than long term yield on bond. Downward Yield curve mean there is chance of chance of recession in economy and that why investor has very less confidence on economy.
Option (C) is correct answer.