Another from sample exam

CFA Level I
#1

If investors expect stable rates of inflation in the future, the pure expectations theory suggests that the yield curve now will be: A. flat B. humped C. inverted D. upward-sloping

#2

Upward sloping…

#3

upward sloping

#4

zing got ya…and me too :frowning: Here’s the answer: The pure expectations theory explains the term structure in terms of expected future short-term interest rates. Assuming that interest rates reflect a relatively stable real rate of interest plus a premium for expected inflation, stability in inflation expectations would mean unchanged future short term interest rates and a flat yield curve. Someone know how to reconcile our answers to this?

#5

based on the expectations theory, the yield curve is only upward sloping if there is an expectation that IRs will increase. Stable inflation expectations means IRs remain stable and therefore no upward slope to yield curve.

#6

that sounds good anyone else want to cosign thems?

#7

anyone else agree with thems explanation?

#8

I looked it up and it’s good.

#9

100% agree with thems. Just remember it by the name “Pure Expectation” If expectations are inflation increase, curve slopes up. Decrease down, etc. Liquidity preference theory also explains upward sloping, and market segmentation could as well. There is some overlap.

#10

pure expectation mean purely depends on expectation if you expect a stable rate of inflation, that mean you expect the term structure also stable no upward sloping

#11

evonne_j Wrote: ------------------------------------------------------- > pure expectation mean purely depends on > expectation > if you expect a stable rate of inflation, that > mean you expect the term structure also stable > no upward sloping Exactly. FLAT. A is the answer.