The term structure of interest rates states that
A) terms of the loan have major effects on the interest rate.
B) the long term interest rate is the geometric mean of the series of short term rates covering the same period.
C) the long term rate would be higher than the individual short term rates in a rising interest rate environment.
D) Both B and C are correct.

Question

Quizplus · Accepted Answer

Option B is correct as per the expectations hypothesis, the long-term interest rate is the geometric average of expected short-term rates over the same period. Option C is correct because in a rising interest rate environment, investors expect higher interest rates in the future, resulting in higher long-term rates. Thus, the correct answer is D, i.e., both B and C are correct.

The Term Structure of Interest Rates States That