What is the shape of the yield curve and what expectations are investors likely to have about future interest rates?
Suppose the term structure of interest rates is shown below:
Term 1 year 2 years 3 years 5 years 10 years 20 years
Rate (EAR%) 5.00% 4.80% 4.60% 4.50% 4.25% 4.15%
A) inverted; higher
B) normal; higher
C) inverted; lower
D) normal; lower
Answer: C
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