Question

Under the expectations hypothesis, if the yield curve is upward-sloping, the market must expect an increase in short-term interest rates. True/false/uncertain

Answer 1

True

Step-by-step explanation:

When we apply the expectations theory, we assume that there is no risk premium associated to the securities (this theory applies to government securities). If the yield curve is upward sloping (positive slope), it means that the short term yields are expected to increase. The time value of money applies to all securities, including government securities, i.e. $1 today is worth more than $1 tomorrow.