In relation to the term structure of interest rates,the expectations theory assumes:
A) there are a large number of financial investors who hold heterogeneous expectations about future interest rates.
B) investors need to take into account costly transactions as they change their expectations.
C) long-term rates paid bonds will be equal to the average of short-term interest rates expected to prevail over the longer term period.
D) there is some impediment to market rates moving to equilibrium.

Question

Quizplus · Accepted Answer

The expectations theory assumes that long-term rates paid by bonds will be equal to the average of short-term interest rates expected to prevail over the longer-term period. This assumption is based on the idea that investors have rational expectations and demand compensation for holding longer-term bonds. The other answer choices do not accurately describe the assumptions of the expectations theory.

In Relation to the Term Structure of Interest Rates,the Expectations