Suppose the expectations hypothesis is true.The current rate of return on a one-year bond is 3%,and the current rate of return on a 2-year bond is 2.5%.What is the expected rate of return next year on a one-year bond?

Question

Quizplus · Accepted Answer

According to the expectations hypothesis, the average of the expected future short-term interest rates should equal the long-term interest rate. Therefore, (3% + expected rate) / 2 = 2.5%, which gives an expected rate of 2%.

Suppose the Expectations Hypothesis Is True