Unlike the segmented markets theory, the expectations theory attributes the slope of the yield curve to
A)tax considerations.
B)the fact that short-term bonds are not perfect substitutes for long-term bonds.
C)market expectations.
D)the variance in the inflation rates over the business cycle.

Question

Quizplus · Accepted Answer

The expectations theory suggests that the slope of the yield curve is based on market expectations of future interest rates. It assumes that investors are indifferent between short-term and long-term bonds and will base their investment decisions on the expected future interest rates, which influence the yields on bonds of different maturities. Therefore, the expectations theory attributes the slope of the yield curve to market expectations.

Unlike the Segmented Markets Theory, the Expectations Theory Attributes the Slope