If an investor has a six-month investment horizon, buying a 5-year, 10-year, or 20-year bond will produce the same six-month return. This interpretation of the pure expectations theory is referred to as the:
A) Return-to-maturity expectation.
B) Local expectations.
C) Broadest interpretation.
D) Liquidity theory.
E) None of the above.

Question

Quizplus · Accepted Answer

The pure expectations theory, particularly in its local expectations interpretation, suggests that the return expected from holding bonds of different maturities (5-year, 10-year, or 20-year) over a short-term horizon (like six months) will be the same, assuming that the yield curve reflects only expectations about future short-term interest rates.

If an Investor Has a Six-Month Investment Horizon, Buying a 5-Year