According to the pure expectations theory of the term structure of interest rates, the ____ the difference between the implied one-year forward rate and today's one-year interest rate, the ____ is the expected change in the one-year interest rate.
A)greater; less
B)less; greater
C)greater; greater
D)less; less

Question

Quizplus · Accepted Answer

The pure expectations theory posits that the difference between the implied forward rate for a future period and today's interest rate for a similar period reflects the market's expectation of future interest rate changes. Therefore, a greater difference suggests a greater expected change in the interest rates.

According to the Pure Expectations Theory of the Term Structure