Which fact about the term structure is the Expectations Theory unable to explain?
A) Why interest rates on bonds with different terms to maturity tend to move together over time
B) Why yields on short-term bonds are more volatile than yields on long-term bonds
C) Why longer-term yields tend to be higher than shorter-term yields
D) Why yields on short-term bonds are more volatile than yields on long-term bonds and why longer-term yields tend to be higher than shorter-term yields

Question

Quizplus · Accepted Answer

The Expectations Theory cannot explain why longer-term yields tend to be higher than shorter-term yields, as it assumes that the yield curve reflects expected future short-term rates, not a risk premium for holding longer-term bonds.

Which Fact About the Term Structure Is the Expectations Theory