According to the unbiased expectations theory,
A)the term structure will most often be upward sloping.
B)liquidity premiums are negative and time varying.
C)the long-term spot rate is an average of the current and expected future short-term interest rates.
D)markets are segmented and buyers stay in their own segment.
E)forward rates are less than the expected future spot rates.

Question

Quizplus · Accepted Answer

According to the unbiased expectations theory, the long-term spot rate is an average of the current and expected future short-term interest rates. This implies that the yield curve would be flat unless market participants expect short-term rates to either rise or fall in the future.

According to the Unbiased Expectations Theory