Question

1-According to the expectations theory of the term structure of interest rates, A a long-term interest...

1-According to the expectations theory of the term structure of interest rates,

A

a long-term interest rate is equal to the average of current and expected future short-term interest rates.
B-

the yield curve is always flat.
C-

a short-term interest rate has no relation to long-term interest rates.

D- a short-term interest rate is equal to the average of current and expected future long-term interest rates.

2-The expectations theory of yield curves is not very realistic because

A-

a key assumption is that investors are risk neutral.
B-

a key assumption is that investors prefer short-term securities.
C-

a key assumption is that investors prefer long-term securities.
D-

a key assumption is that investors are risk averse.
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Answer #1

Ans:

1) Option A

a long-term interest rate is equal to the average of current and expected future short-term interest rates.

As per expectations theory long term interest rates is equals to the market consensus expectation of future short term interest rates.Hence the forward rate is the average of current and expected future short-term interest rates.

2) Option D

a key assumption is that investors are risk averse.

A risk averse investor is an investor who want lower returns but with known risks instead of higher returns and unknown risks.It is a key assumption in expectations theory of yield curves.

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