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.
E)None of the above.

Question

Quizplus · Accepted Answer

The unbiased expectations theory of the term structure of interest rates assumes that long-term interest rates are an average of expected future short-term rates. In other words, the yield curve reflects the market's current expectations of future short-term interest rates. This theory assumes that market participants have no preference for maturity, and therefore no risk premiums are added to long-term rates.

The Unbiased Expectations Theory of the Term Structure of Interest