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 assumes that investors form expectations of the yields on short-term bonds in future time periods based on the yields on bonds today. This hypothesis suggests that long-term yields are a function of current and expected future short-term yields, and it assumes that investors have access to all relevant information when forming their expectations.

The Expectations Hypothesis Assumes