Which term-structure hypothesis suggests that any long-term interest rate simply represents the geometric mean of current and future on-year interest rates expected to prevail over the maturity of the issue?
A) Expectations hypothesis
B) Liquidity preference hypothesis
C) Segmented market hypothesis
D) Preferred habitat hypothesis
E) Hedging pressure hypothesis

Question

Quizplus · Accepted Answer

The Expectations hypothesis suggests that the long-term interest rate is the geometric mean of expected future short-term interest rates. This implies that investors expect the average yield of short-term bonds over the life of the long-term bond to be equal to the yield of the long-term bond.

Which Term-Structure Hypothesis Suggests That Any Long-Term Interest Rate Simply