the slope of the yield curve reflects the risk premium incorporated into the yields on long-term bonds. According to the expectations theory of the term structure, when the yield curve is steeply upward-sloping, short-term interest rates are expected to rise in the future. d.)the yield curve should usually be downward-sloping. According to the expectations hypothesis, an upward-sloping yield curve implies that the market is expecting future short-term interest rates to rise. The expectations theory suggests that a.) 1. In addition to the slope of the yield curve, we also are interested in changes or shifts in yield curves over time. D. The segmented markets theory does a better job of explaining why the yields on bonds of different )the yield curve should usually be upward-sloping. Hence, the yield curve slopes upward, even if future interest rates are expected to remain flat or even decline a little, and so the liquidity premium theory of the term structure of interest rates explains the generally upward sloping yield curve for bonds of different maturities. The yield curve can be upward sloping at a given time, as well as becoming upward sloping over time. when the yield curve is downward-sloping, short-term interest rates are expected to remain relatively stable in the future. The normal upward-sloping yield curve follows the “Liquidity Preference Theory,” which suggests that investors wish to be compensated for holding longer-term securities. c.)the slope of the yield curve depends on the expected future path of short-term rates. yield curves should be equally likely to slope downward as slope upward According to the expectations theory of term structure, the interest rate for each maturity bond is determined by supply and demand for that maturity bond This theory is consistent with the empirical result that yield curve tends to be often upward sloping than they are downward sloping. Investor takeaways b. When there is an upward sloping yield curve… The upward shift in the yield curve from July 2003 to July 2004 most likely reflects increased strength in the overall economy over the period rather than an increase in inflation expectations. An upward sloped yield curve indicates that investors expect the economy to improve in the future and demand higher interest rates on investments in securities of longer-term maturities for increased returns in a growing economy. The Yield Curve is a graphical representation of the interest rates on debt for a range of maturities. Liquidity Premium = Illiquid Bond YTM – Liquid Bond YTM Analysts look to the slope of the yield curve for clues about how future short-term interest rates will trend. The expectations theory does a better job of explaining why yield curves are usually upward-sloping. The graph displays a bond's yield on the vertical axis and the time to maturity across the horizontal axis. It shows the yield an investor is expecting to earn if he lends his money for a given period of time. Expectations theory does a better job of explaining why yield curves over time horizontal axis sloping than they are sloping... 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