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Describe the “pure expectations theory” of the term structure of interest rates

Describe the “pure expectations theory” of the term structure of interest rates

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Expectations theory is aimed to find that, what short term interest rates would be in future based upon the current long term rates. It asserts that forward rate exclusively present the expected future rates.Entire term structure reflects the market expectations of future short-term rates.

So expectations theory is based upon derivation of forward short term rates based upon the current long-term rates and it asserts that forward rate is representative of expected future rates.

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