According to the unbiased expectations theory,
A)markets are segmented and buyers stay in their own segment.
B)liquidity premiums are negative and time varying.
C)the term structure will most often be upward sloping.
D)the long-term spot rate is an average of the current and expected future short-term interest rates.
E)forward rates are less than the expected future spot rates.

Question

Quizplus · Accepted Answer

The unbiased expectations theory suggests that the long-term spot rate is equal to a weighted average of current and expected future short-term interest rates. This assumes that market participants have unbiased expectations about future interest rate movements, and that there is no preference for holding bonds of a particular maturity. Therefore, the term structure of interest rates is generally expected to be upward sloping, as longer-term rates are typically higher than shorter-term rates to compensate for the additional risk of holding bonds over a longer period of time. The theory does not suggest anything about market segmentation or time varying liquidity premiums, and forward rates are theoretically equal to expected future spot rates in a risk-neutral world.

According to the Unbiased Expectations Theory