According to the expectations theory of the term structure A. the interest rate
ID: 1142156 • Letter: A
Question
According to the expectations theory of the term structure
A. the interest rate on long-term bonds will exceed the average of short-term interest rates that people expect to occur over the life of the long-term bonds, because of their preference for short-term securities.
B. interest rates on bonds of different maturities move together over time.
C. buyers of bonds prefer short-term to long-term bonds.
D. buyers require an additional incentive to hold long-term bonds.
A. the interest rate on long-term bonds will exceed the average of short-term interest rates that people expect to occur over the life of the long-term bonds, because of their preference for short-term securities.
B. interest rates on bonds of different maturities move together over time.
C. buyers of bonds prefer short-term to long-term bonds.
D. buyers require an additional incentive to hold long-term bonds.
Explanation / Answer
Expectations theory of the term structure states that the interest rate on long-term bonds is equal to the average of the short-term interest rates.
Expectations theory of the term structure also indicates that interest rates on bonds of different maturities move together overtime.
Hence, the correct answer is the option (B).