According to pure expectations theory, the yield curve should on average be
A) upward sloping.
B) downward sloping.
C) flat.
D) vertical.

Question

Quizplus · Accepted Answer

According to pure expectations theory, the yield curve should be flat on average. This theory assumes that the forward rates (implied by current yields) are unbiased estimates of future spot rates, which means that long-term rates should be the same as the average of short-term rates over the same period. Therefore, there is no reason for the yield curve to have a slope. However, in reality, other factors such as market expectations, supply and demand, and economic conditions can cause the yield curve to deviate from a flat shape.

According to Pure Expectations Theory, the Yield Curve Should on Average