If the Expectations Theory of the Term Structure of Interest

question 6

Multiple Choice

If the expectations theory of the term structure of interest rates is correct,and if the other term structure theories are invalid,and we observe a downward sloping yield curve,which of the following is a true statement?

• A) Investors expect short-term rates to be constant over time.
• B) Investors expect short-term rates to increase in the future.
• C) Investors expect short-term rates to decrease in the future.
• D) It is impossible to say unless we know whether investors require a positive or negative maturity risk premium.
• E) The maturity risk premium must be positive.