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Suppose the yield curve is downward sloping. Based on the expectations theory, what does this...

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Finance

Suppose the yield curve is downward sloping. Based on the expectations theory, what does this tell us about future short-term interest rates?

Caroline Williams, a trainee at an investment banking firm, is trying to get an idea of what real rate of return investors are expecting in todays marketplace. She has looked up the rate paid on 3-month U.S. Treasury bills and found that it to be 3.25%. She has decided to use the rate of change in the Consumer Price Index as a proxy for the inflationary expectation of investors. That annualized rate now stands at 1.6%. On the basis of the information that Caroline has collected, what estimate can he make of the real rate of return?

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