Which theory of term structure posits that long-term rates are a geometric average of current and expected short-term interest rates?
A)The unbiased expectations theory.
B)The liquidity premium theory.
C)The loanable funds theory.
D)The market segmentation theory.

Question

Quizplus · Accepted Answer

The unbiased expectations theory argues that long-term rates are a geometric average of current and expected short-term interest rates. It assumes that investors are indifferent between holding short-term and long-term bonds and that they have rational expectations about future interest rates. Therefore, long-term rates should reflect the market's consensus on future interest rates, which can be inferred from current short-term rates and expected future short-term rates.

Which Theory of Term Structure Posits That Long-Term Rates Are