Assuming that the term structure of interest rates is determined as posited by the pure expectations theory,which of the following statements is CORRECT?
A) In equilibrium,long-term rates must be equal to short-term rates.
B) An upward-sloping yield curve implies that future short-term rates are expected to decline.
C) The maturity risk premium is assumed to be zero.
D) Inflation is expected to be zero.
E) Consumer prices as measured by an index of inflation are expected to rise at a constant rate.

Question

Quizplus · Accepted Answer

The pure expectations theory posits that the shape of the yield curve reflects market expectations about future interest rates, with the assumption that investors do not require a maturity risk premium for holding longer-term bonds. This means that the theory assumes the maturity risk premium is zero.

Assuming That the Term Structure of Interest Rates Is Determined