Which of the following statements is CORRECT?
A) Downward sloping yield curves are inconsistent with the expectations theory.
B) The actual shape of the yield curve depends only on expectations about future inflation.
C) If the pure expectations theory is correct,a downward sloping yield curve indicates that interest rates are expected to decline in the future.
D) If the yield curve is upward sloping,the maturity risk premium must be positive and the inflation rate must be zero.
E) Yield curves must be either upward or downward sloping - they cannot first rise and then decline.

Question

Quizplus · Accepted Answer

The pure expectations theory holds that the shape of the yield curve is determined solely by expectations of future interest rates. Therefore, if the yield curve is downward sloping, it indicates that interest rates are expected to decline in the future. Choices A, B, D, and E have incorrect or incomplete statements.

Which of the Following Statements Is CORRECT