According to the expectations theory, if investors believed that, for a holding period the average of the expected future short-term yields was greater than the long-term yield, they would act so as to
A)drive up the price of the short-term security and drive down the price of the long-term security.
B)drive down the price of the short-term security and drive up the price of the long-term security.
C)drive down the prices of the short-term and long-term securities.
D)drive up the prices of the short-term and long-term securities.

Question

Quizplus · Accepted Answer

According to the expectations theory, if investors believe that the average of the expected future short-term yields is greater than the long-term yield, they will expect to earn a higher return by investing in short-term securities than in long-term securities. This will lead to an increase in demand for short-term securities, driving up their prices and driving down the prices of long-term securities.

According to the Expectations Theory, If Investors Believed That, for a Holding