- CFA Exams
- CFA Level I Exam
- Topic 6. Fixed Income
- Learning Module 26. The Term Structure and Interest Rate Dynamics
- Subject 4. Traditional Theories of the Term Structure of Interest Rates
CFA Practice Question
The unbiased expectations theory:
B. predicts a flat yield curve.
C. does not make such predictions.
A. predicts an upward-sloping yield curve.
B. predicts a flat yield curve.
C. does not make such predictions.
Correct Answer: C
The theory states if investors expect higher rates, then the yield curve is upward sloping, and vice versa. The forward rate represent the average opinion of the expected future spot rate for the period in question.
User Contributed Comments 2
| User | Comment |
|---|---|
| charliedba | The future spot rate is greater than current rates due to expectations of inflation. However if deflation is expected, the term structure and yield curve are downward sloping. |
| dancer | The expected return for every bond over short time period is the risk-free rate. Risk premiums do exist on long-term bond investments. |