Association for Financial Professionals (AFP) Practice Exam

Question: 1 / 400

What is indicated by a downward sloping yield curve?

Rising inflation expectations

Investors expect lower returns in the future

Increased demand for long-term bonds compared to short-term bonds

Expectation of an economic downturn or lower interest rates

A downward sloping yield curve, often referred to as an inverted yield curve, suggests that investors expect lower interest rates in the future, typically as a result of anticipated economic downturns. This phenomenon occurs when long-term interest rates fall below short-term rates, indicating that investors have a pessimistic outlook on future economic growth and are seeking the relative safety of long-term bonds.

In an environment where the yield curve is inverted, it implies that market participants believe that the central bank will likely reduce interest rates to stimulate the economy as growth slows. This expectation can lead to a preference for long-term bonds, as investors lock in current yields before they decline further in response to weakening economic conditions.

Understanding this context helps clarify the significance of a downward sloping yield curve and its implications for economic activity and interest rates.

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