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) the market's view of future short-term interest rates.
D) the variance in the inflation rates over the business cycle.

Question

Quizplus · Accepted Answer

The expectation theory suggests that the shape of the yield curve is determined by the market's expectation of future short-term interest rates. This means that if investors expect interest rates to rise in the future, the yield curve would slope upwards and vice versa. Tax considerations and inflation rates may influence bond prices, but they do not directly cause the shape of the yield curve. The fact that short-term bonds are not perfect substitutes for long-term bonds also does not fully explain the shape of the yield curve.

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