Under the preferred habitat theory, a flat yield curve indicates that investors expect future short-term rates to
A)fall.
B)rise.
C)remain constant.
D)either fall or remain constant.

Question

Quizplus · Accepted Answer

According to the preferred habitat theory, investors tend to have a preference for certain maturities based on their investment goals and risk preferences. When the yield curve is flat, it suggests that investors are indifferent to various maturities and do not expect much difference in yield. This could mean that investors expect future short-term rates to remain the same or fall, as they are content with receiving similar yields regardless of the maturity. However, since the question asks for the most likely option, A -fall - is the best choice as it implies an expectation of lower yields in the future.

Under the Preferred Habitat Theory, a Flat Yield Curve Indicates