Which of the following statements is CORRECT?
A) Even if the pure expectations theory is correct,there might at times be an inverted Treasury yield curve.
B) If the yield curve is inverted,short-term bonds have lower yields than long-term bonds.
C) The higher the maturity risk premium,the higher the probability that the yield curve will be inverted.
D) Inverted yield curves can exist for Treasury bonds,but because of default premiums,the corporate yield curve cannot become inverted.
E) The most likely explanation for an inverted yield curve is that investors expect inflation to increase in the future.

Question

Quizplus · Accepted Answer

The pure expectations theory states that long-term interest rates are simply the average of expected future short-term interest rates. However, external factors such as economic uncertainty can cause an inverted yield curve where short-term bond yields are higher than long-term bond yields, even if the pure expectations theory is correct.

Which of the Following Statements Is CORRECT