The interest rate on long-term bonds is somewhat higher than suggested by the expectations theory because

Question

Quizplus · Accepted Answer

The expectations theory assumes that long-term interest rates are simply the sum of expected future short-term interest rates. However, investors demand a risk premium to compensate for the greater uncertainty and potential default risk associated with long-term bonds, thus resulting in a slightly higher interest rate on long-term bonds.

The Interest Rate on Long-Term Bonds Is Somewhat Higher Than