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 posits that investors base their decisions on long-term bonds on their expectations of short-term bond yields in the future. Therefore, choice B accurately reflects this assumption. Choices A, C, and D are all incorrect because they do not reflect the assumptions of the Expectations Hypothesis.

The Expectations Hypothesis Assumes