Which fact about the term structure is the expectations theory unable to explain?
A) Why interest rates on bonds with different terms to maturity tend to move together over time.
B) Why yields on short-term bonds are more volatile than yields on long-term bonds.
C) Why longer-term yields tend to be higher than shorter-term yields.
D) Why long-term bond yields are influenced by expected future short-term bond yields.

Question

Quizplus · Accepted Answer

The expectations theory suggests that long-term interest rates are a reflection of current and expected future short-term interest rates. However, it does not adequately explain why longer-term yields are typically higher than shorter-term yields, a phenomenon often attributed to the term premium, which compensates investors for the increased risk of holding longer-term bonds.

Which Fact About the Term Structure Is the Expectations Theory