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 above.
E)none of the above.

Question

Quizplus · Accepted Answer

The expectations theory of the term structure of interest rates states that forward rates are determined by investors' expectations of future interest rates. Therefore, option A is correct. Option B is incorrect because it is the opposite of what the expectations theory suggests. Option C is incorrect because it is an explanation of the supply and demand model of bond prices, which is not applicable to the expectations theory. Option D is incorrect because option C is incorrect, and option A already provides a complete explanation of the theory. Option E is incorrect because the expectations theory is a well-established model in financial economics.

The Expectations Theory of the Term Structure of Interest Rates