Suppose the Economy Has an Inverted Yield Curve

question 82

Multiple Choice

Suppose the economy has an inverted yield curve. According to the expectations hypothesis, which of the following interpretations could be used to explain this?

• A) Interest rates are expected to fall in the future
• B) Investors prefer bonds with less default risk.
• C) Investors prefer bonds with less interest-rate risk.
• D) The term spread is positive.

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Definitions:

Maturity Value

The total amount that will be paid to an investor at the end of a fixed-term investment, including the principal and interest.

Per-annum Rate

Another term for annual rate, indicating the interest rate or growth rate over a single year.

Bank Loan

Money lent by a bank to a customer, usually with interest, that is expected to be repaid within a certain period.

Outstanding Principal

The remaining amount of money borrowed that has not yet been repaid.