The implication of the expectations theory that expected returns for a holding period must be the same for bonds of different maturities depends on the assumption that:
A) yield curves normally slope downward.
B) yield curves normally slope upward.
C) instruments with different terms to maturity are perfect substitutes.
D) lenders are generally risk-averse.

Question

Quizplus · Accepted Answer

The expectations theory assumes that instruments with different terms to maturity are perfect substitutes, meaning that investors are indifferent between holding a bond with a shorter maturity and rolling it over into a bond with a longer maturity versus just buying a bond with a longer maturity to begin with. This assumption allows for the expected returns for a holding period to be the same for bonds of different maturities.

The Implication of the Expectations Theory That Expected Returns for a Holding