If the expectations theory holds we would expect that the yield curve would be upward sloping as often as it is downward sloping (what goes up must come down). We would expect that sometimes the yield curve would be perfectly flat. Yet it is upward sloping most of the time. What explanation, theory, or hypothesis for this phenomenon is commonly accepted in the financial markets?

A.

Consider the previous question. How to banks attempt to make money by the phenomenon described above?

B.

Consider the previous two questions. What is the risk for banks pursuing the strategy you described above?