You are a financial consultant. At various times you have heard comments on interest rates from one of your clients. How would you respond to each comment?
(a) Respond to: “The yield curve is upward-sloping today. This suggests that the market consensus is that interest rates are expected to increase in the future.”
(b) Respond to: “I can’t make any sense out of today’s term structure. For short-term yields (up to three years) the spot rates increase with maturity; for maturities greater than three years but less than eight years, the spot rates decline with maturity; and for maturities greater than eight years the spot rates are virtually the same for each maturity. There is simply no theory that explains a term structure with this shape.”
(c) Respond to: “When I want to determine the market’s consensus of future interest rates, I calculate the forward rates.”