The idea that investors today compare the returns on bonds with differing times to maturity to see which is expected to give them the highest return is the underlying principle behind the ________ of the term structure of interest rates.

Question

Quizplus · Accepted Answer

The expectations theory of the term structure of interest rates is based on the idea that investors compare the returns on bonds with differing times to maturity in order to determine which will give them the highest expected return. This theory assumes that investors are rational and will choose investments based on their expected returns, and that long-term interest rates are essentially the average of expected short-term rates over the same period.

The Idea That Investors Today Compare the Returns on Bonds