The unbiased expectations theory of the term structure of interest rates:
A)assumes that long-term interest rates are an arithmetic average of short-term rates
B)assumes that the yield curve reflects the market's current expectations of future short-term interest rates
C)recognises that forward rates are perfect predictors of future interest rates
D)assumes that risk premiums increase uniformly with maturity

Question

Quizplus · Accepted Answer

The unbiased expectations theory assumes that the yield curve reflects the market's current expectations of future short-term interest rates. It implies that long-term interest rates are an average of expected future short-term rates, but not necessarily an arithmetic average. It also does not assume that forward rates are perfect predictors of future interest rates nor that risk premiums increase uniformly with maturity.

The Unbiased Expectations Theory of the Term Structure of Interest