Question #35
Reading: Reading 25 The Term Structure and Interest Rate Dynamics
PDF File: Reading 25 The Term Structure and Interest Rate Dynamics.pdf
Page: 13
Status: Incorrect
Correct Answer: B
Your Answer: A
Question
Assuming the pure expectations theory is correct, an upward sloping yield curve implies:
Answer Choices:
A. longer-term bonds are riskier than short-term bonds
B. interest rates are expected to decline in the future
C. interest rates are expected to increase in the future
Explanation
The yield curve slopes upward because short-term rates are lower than long-term rates.
Since market rates are determined by supply and demand, it follows that investors
(demand side) expect rates to be higher in the future than in the near-term.