Question 9 If the expectations theory of the term structure of interest rates is correct and the other term structure theories are invalid, and if we observe a downward-sloping yield curve, which of...

Question 9

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

1. 
   

   Investors expect short-term rates to be constant over time.

   
   


2. 
   

   Investors expect short-term rates to increase in the future.

   
   


3. 
   

   Investors expect short-term rates to decrease in the future.

   
   


4. 
   

   Investors expect short-term rates to be unchanged in the future.