The unbiased expectations theory of the term structure of interest rates
A)assumes that long-term interest rates are an arithmetic average of short-term rates.
B)assumes that the yield curve reflects the market's current expectations of future short-term interest rates.
C)recognizes that forward rates are perfect predictors of future interest rates.
D)assumes that risk premiums increase uniformly with maturity.
E)None of the options.

Question

Quizplus · Accepted Answer

The unbiased expectations theory of the term structure of interest rates assumes that the yield curve reflects the market's current expectations of future short-term interest rates. It suggests that long-term interest rates are determined by the market's expectation of future short-term interest rates and that investors are indifferent between investing in short-term or long-term bonds. The theory does not assume an arithmetic average of short-term rates, nor does it suggest that forward rates are perfect predictors of future interest rates. It also does not assume that risk premiums increase uniformly with maturity.

The Unbiased Expectations Theory of the Term Structure of Interest