If three-year securities are yielding 6% and two-year securities are yielding 5.5%, future short-term rates are expected to ______, and outstanding security prices are expected to ______.
A) fall; fall.
B) rise; fall.
C) fall; rise.
D) rise; rise

Question

Quizplus · Accepted Answer

Future short-term rates are expected to rise because the yield on longer-term securities is higher, indicating an expectation of higher rates. As rates rise, outstanding security prices are expected to fall.

If Three-Year Securities Are Yielding 6% and Two-Year Securities Are