According to the expectations theory of term structure,if investors believed that the average of the expected future short-term yields was greater than the long-term yield for a holding period,they would act so as to:
A) drive down the price of the short-term security and drive up the price of the long-term security.
B) drive up the price of the short-term security and drive down the price of the long-term security.
C) drive up the prices of both the short-term and long-term securities.
D) drive down the prices of both the short-term and long-term securities.

Question

Quizplus · Accepted Answer

According to the expectations theory of term structure, if investors believe that the average of expected future short-term yields is greater than the long-term yield, they would buy more of the short-term securities to take advantage of the higher yields, driving up the price of the short-term security. At the same time, they would sell long-term securities, driving down their prices, as investors do not want to be locked in to a low long-term yield when short-term yields are expected to rise. Therefore, the correct answer is B, which states that investors would drive up the price of short-term securities and drive down the price of long-term securities.

According to the Expectations Theory of Term Structure,if Investors Believed