The unbiased expectations theory of the term structure of interest rates
A)assumes that long-term interest rates are an arithmetic average of short-term rates.
B)assumes that the yield curve reflects the market's current expectations of future short-term interest rates.
C)recognizes that forward rates are perfect predictors of future interest rates.
D)assumes that risk premiums increase uniformly with maturity.

Question

Quizplus · Accepted Answer

The unbiased expectations theory of the term structure of interest rates assumes that the yield curve reflects the market's current expectations of future short-term interest rates. This theory suggests that long-term interest rates are an average of expected future short-term interest rates, and not a pure reflection of current short-term interest rates. Therefore, if market participants expect short-term interest rates to increase in the future, long-term interest rates will be higher to compensate for the expected increase. This theory can help explain the shape of the yield curve at any point in time.

The Unbiased Expectations Theory of the Term Structure of Interest