In actual practice,short-term interest rates are just as likely to fall as to rise; this is the major shortcoming of the
A) market segmentation theory.
B) expectations theory.
C) liquidity premium theory.
D) separable markets theory.

Question

Quizplus · Accepted Answer

The expectations theory assumes that investors view short-term bonds and long-term bonds as perfect substitutes and that the yield curve reflects market expectations of future interest rates. However, in actual practice, short-term interest rates are just as likely to fall as to rise, leading to a flaw in the assumptions of the expectations theory. Of the given options, this flaw is most relevant to the expectations theory.

In Actual Practice,short-Term Interest Rates Are Just as Likely to Fall