According to the Expectations Hypothesis, if investors believed that, for a given holding period, the average of the expected future short-term yields was greater than the long-term yield for the holding period, they would act so as to:
A) Drive down the price of the short-term bond and drive up the price of the long-term bond
B) Drive up the price of the short-term bond and drive down the price of the long-term bond
C) Drive up the prices of both the short- and long-term bonds
D) Drive down the prices of both the short- and long-term bonds

Question

Quizplus · Accepted Answer

According to the Expectations Hypothesis, if investors believe that future short-term yields will be higher than the long-term yield, then they would prefer to hold short-term bonds rather than long-term bonds. This increased demand for short-term bonds would drive up their price, while the decreased demand for long-term bonds would drive down their price. Therefore, the correct choice is B.

According to the Expectations Hypothesis, If Investors Believed That, for a Given