The expectations theory of the term structure of interest rates states that
A)forward rates are determined by investors' expectations of future interest rates.
B)forward rates exceed the expected future interest rates.
C)yields on long- and short-maturity bonds are determined by the supply and demand for the securities.
D)All of the options are correct.

Question

Quizplus · Accepted Answer

The expectations theory of the term structure of interest rates asserts that forward rates are determined by the market's expectations of future interest rates. Therefore, it suggests that investors can estimate future short-term interest rates based on the current yield curve. Thus, A is the correct option.

The Expectations Theory of the Term Structure of Interest Rates