The most widely used theory to explain the term structure of interest rates is the:

Question

Quizplus · Accepted Answer

The dominant rationale for the shape of the term structure of interest rates rests on a phenomenon called the expectations hypothesis. The hypothesis is that any long-term rate is an average of the expectations of future short-term rates over the applicable time horizon. Thus, if lenders expect short-term rates to be continually increasing, they will demand higher long-term rates. Conversely, if they anticipate short-term rates to be declining, they will accept lower long-term rates.

The Most Widely Used Theory to Explain the Term Structure