Under the pure expectations theory, the shape of the yield curve is determined by current short-term rates and expectations for future short-term rates (forward rates) with the interest rate on a long-term bond equal to the average of current short-term and expected short-term rates over the life of a long-term bond.

Question

Quizplus · Accepted Answer

This statement accurately describes the pure expectations theory.

Under the Pure Expectations Theory, the Shape of the Yield