The implication of the expectations theory that expected returns for a holding period must be the same for bonds of different maturities depends on the assumption that
A)yield curves usually slope upward.
B)yield curves usually slope downward.
C)instruments with different maturities are perfect substitutes.
D)savers are usually risk averse.

Question

Quizplus · Accepted Answer

The expectations theory assumes that instruments with different maturities are perfect substitutes, meaning that an investor would be indifferent between investing in a short-term bond or a long-term bond if the expected returns were the same. Therefore, the theory implies that expected returns for a holding period must be the same for bonds of different maturities. The theory is not dependent on the slope of the yield curve or the risk aversion of savers.

The Implication of the Expectations Theory That Expected Returns for a Holding