Which theory of term structure posits that long-term rates are a geometric average of current and expected short-term interest rates?
A)The unbiased expectations theory.
B)The liquidity premium theory.
C)The loanable funds theory.
D)The market segmentation theory.
E)None of the above.

Question

Quizplus · Accepted Answer

This theory posits that long-term rates are a geometric average of current and expected short-term interest rates. It assumes that market participants have access to the same information and do not hold any biases in their expectations about future interest rates. This theory suggests that long-term rates will be equal to the average of the expected short-term rates over the same time horizon.

Which Theory of Term Structure Posits That Long-Term Rates Are