Which term-structure hypothesis suggests that any long-term interest rate simply represents the geometric mean of current and future on-year interest rates expected to prevail over the maturity of the issue?
A) expectations hypothesis
B) liquidity preference hypothesis
C) segmented market hypothesis
D) preferred habitat hypothesis
E) hedging pressure hypothesis

Question

Quizplus · Accepted Answer

The expectations hypothesis suggests that the shape of the yield curve reflects market expectations of future short-term interest rates. It assumes that any long-term interest rate simply represents the geometric mean of current and future one-year interest rates expected to prevail over the maturity of the issue. This hypothesis is also known as the pure expectations theory.

Which Term-Structure Hypothesis Suggests That Any Long-Term Interest Rate Simply