The ________ of the term structure of interest rates states that the interest rate on a long-term bond will equal the average of short-term interest rates that individuals expect to occur over the life of the long-term bond,and investors have no preference for short-term bonds relative to long-term bonds.
A)segmented markets theory
B)expectations theory
C)liquidity premium theory
D)separable markets theory

Question

Quizplus · Accepted Answer

The description given in the question matches the expectations theory of the term structure of interest rates, which states that the long-term interest rate is an average of expected future short-term interest rates. The theory assumes that there is no preference for short-term or long-term bonds, and it only depends on expectations of future interest rates.

The ________ of the Term Structure of Interest Rates States