If the _______ regarding the shape of the yield curve is correct, an investor will receive the same return on average if they buy a two year STRIPS or two consecutive one year STRIPS.
A) maturity preference theory
B) Fisher hypothesis
C) expectations theory
D) market segmentation theory
E) forward rate theory

Question

Quizplus · Accepted Answer

The statement in the question is based on the expectations theory, which suggests that the shape of the yield curve reflects market expectations about future interest rates. Under this theory, an investor will receive the same return on average from a series of shorter-term bonds as they would from a longer-term bond with the same overall maturity. Therefore, if the yield curve is based on the expectations theory, an investor should receive the same return on average from a two-year STRIPS or two consecutive one-year STRIPS.

If the _______ Regarding the Shape of the Yield Curve