The expectations theory of the term structure of interest rates states that
A) forward rates are determined by investors' expectations of future interest rates.
B) forward rates exceed the expected future interest rates.
C) yields on long- and short-maturity bonds are determined by the supply and demand for the securities.
D) All of the options are correct.
E) None of the options are correct.

Question

Quizplus · Accepted Answer

The expectations theory of the term structure of interest rates posits that the forward rates reflect investors' expectations of future interest rates. This theory suggests that the yield curve's shape is determined by expectations about future interest rates rather than by investors' risk preferences or market supply and demand conditions.

The Expectations Theory of the Term Structure of Interest Rates