Explanation:
The Expectations Theory (or Pure Expectations Theory) posits that the forward rates embedded in the yield curve are unbiased expectations of future short-term interest rates. Consequently, a downward-sloping yield curve indicates that the market expects short-term interest rates to fall in the future.
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Q.26 “The yield curve will be downward sloping if the market believes that future short-term interest rates will be less than the current short-term interest rate.” This statement about the term structure of interest rates is most consistent with the:
A
Liquidity preference theory.
B
Market segmentation theory.
C
Expectations theory.
D
None of the above.
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