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Which of the following is/are true?

a. Downward sloping yield curves are inconsistent with the expectations theory.
b. The actual shape of the yield curve depends only on expectations about future inflation.
c. If the pure expectations theory is correct, a downward sloping yield curve indicates that interest rates are expected to decline in the future.
d. If the yield curve is upward sloping, the maturity risk premium must be positive and the inflation rate must be zero.
e. Yield curves must be either upward or downward sloping they cannot first rise and then decline

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Martebi

Answer:

If the pure expectations theory is correct, a downward-sloping yield curve indicates that interest rates are expected to decline in the future.

Explanation:

The three theories based on term structure of interest rates includes:

1. Pure Expectation Theory

2. Liquidity Premium Theory

3.Segmented Markets Theory

In Pure Expectations Theory, the term structure shown in the shape of the yield curve is gotten solely by the expectations of interest rates.

According to pure expectations theory, the yield curve has an Upward sloping, if there is an expected increase in rates and expected decrease in rates leads to a downward sloping.

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