A Downward-Sloping Yield Curve Usually Means That

question 83

Multiple Choice

A downward-sloping yield curve usually means that

• A)interest rates are abnormally high.
• B)market participants expect future short-term interest rates to fall.
• C)long-term rates are lower than short-term rates.
• D)All of the above are correct.

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Definitions:

MM Model

The Modigliani-Miller theorem, proposing that in a perfect market, the value of a firm is unaffected by how it is financed, whether through debt or equity.

Financial Leverage

The use of borrowed funds with a fixed cost to enhance the potential return on investment.

Bankruptcy Risk

The risk that a company will be unable to meet its financial obligations and thus may have to declare bankruptcy.

Operating Leverage

A measure of how sensitive a company's operating income is to a change in revenue, indicating the level of fixed versus variable costs.