Question

According to the expectations theory of the term structure Question 17 options: A) yield curves should be equally likely to slope downward as slope upward. B) investors have strong preferences for short-term relative to long-term bonds, explaining why yield curves typically slope upward. C) when the yield curve is steeply upward sloping, short-term interest rates are expected to remain relatively stable in the future. D) when the yield curve is downward sloping, short-term interest rates are expected to remain relatively stable in the future.

Answer 1

A and C is correct

Explanation:

According to the expectations theory of the term structure :

• The yield curves should also decrease as the slope upward.
• Short-term prices are expected to stay fairly stable in forward whenever the return curve is sharply increasing.

Theory of expectations is focused on investors ' confidence in forward prices as future contracts represent (and some might argue predict) potential short-term interest rates.

Investors in two recent 1-year bond transactions and investing in a single two-year bond today show the same level of value.