CFA Practice Question
If the yield curve is declining sharply, then interest rates will most likely ______.
A. rise
B. there is no relationship between the yield curve and interest rates
C. decline
Explanation: If the yield curve is declining sharply, historical evidence suggest that interest rates will probably decline. Bond investors therefore can use prevailing yield curve to predict the shapes of future yield curves.
User Contributed Comments 3
| User | Comment |
|---|---|
| KD101 | Yield curve does not decline - it steepens or flattens? The answer is correct if you assume that it is flattening - then market expect rates to decline and most likely it will |
| leftcoast | KD101 - the yield curve can most definitely decline. It declined on many occasions in the late 70's and early 80's. It was also slightly declining around 2006. |
| jjhigdon | Pure Expectations Theory = Spot rates are the geometric average of forward rates (expected future rates). Ergo, inverted yield curve means declining spot rates as you go further out on the curve which implies lower forward rates or expected future rates. |