The expectations hypothesis assumes:
A) a high level of uncertainty regarding the future of long-term yields.
B) investors know the yields on bonds today and form expectations of the yields on short-term bonds in future time periods.
C) securities of different maturities are not perfect substitutes for each other.
D) the risk premium increases with longer maturities.

Question

Quizplus · Accepted Answer

The expectations hypothesis states that investors form expectations of future short-term bond yields based on the current yield curve. Therefore, choice B is the most accurate statement. The other options regarding uncertainty, substitutability, and risk premium are not directly related to this hypothesis.

The Expectations Hypothesis Assumes