The expectations theory suggests that the shape of the yield curve reflects investors expectations about future interest rates.

Question

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The expectations theory is based on the premise that the yield curve reflects investors' expectations about future interest rates. The theory suggests that investors will demand higher rates for longer-term bonds if they expect interest rates to rise in the future, resulting in a steep yield curve. Conversely, if investors expect rates to remain stable, the yield curve will be flat or inverted.

The Expectations Theory Suggests That the Shape of the Yield