The theory for the term structure of interest rates that says the shape of the yield curve is determined solely by expectations of future interest rates is called the
A)segmented markets theory.
B)liquidity premium theory.
C)pure expectations theory.
D)theory of rational expectations.

Question

Quizplus · Accepted Answer

The Pure Expectations Theory, also known as the Expectations Theory, posits that the shape of the yield curve is determined solely by current expectations of future short-term interest rates. According to this theory, long-term interest rates are an average of current and future short-term interest rates expected by the market.

The Theory for the Term Structure of Interest Rates That