Of the four theories that explain how interest rates on bonds with different terms to maturity are related,the one that views long-term interest rates as equaling the average of future short-term rates expected to occur over the life of the bond is the
A) pure expectations theory.
B) preferred habitat theory.
C) liquidity premium theory.
D) segmented markets theory.

Question

Quizplus · Accepted Answer

The pure expectations theory states that long-term interest rates are equal to the average of expected future short-term rates over the life of the bond. This theory suggests that investors do not have a preference for any particular maturity and are only concerned about the expected returns. Therefore, the correct answer is A) Pure expectations theory.

Of the Four Theories That Explain How Interest Rates on Bonds