According to the expectations hypothesis a rising yield curve indicates that investors expect
A) future short term rates to fall
B) future short term rates to rise
C) future long term rates to rise
D) future long term rates to fall
E) None of the above.

Question

Quizplus · Accepted Answer

The expectations hypothesis states that long-term interest rates are determined by the market's expectation of future short-term interest rates. If investors believe that short-term rates will rise in the future, they will demand a higher yield on long-term bonds to compensate for the uncertainty and potential loss if they were to invest in shorter-term bonds. Therefore, a rising yield curve indicates that investors expect future short-term rates to rise.

According to the Expectations Hypothesis a Rising Yield Curve Indicates