Question

Which of the term structure theories would support the argument that the yield curve is determined by investors' expectations of future interest rates?

Answer Options:

The yield curve theory.

The liquidity preference theory.

The market segmentation theory.

The unbiased expectations theory.

The term structure of interest rates theory.

Answer 1

Option '4' is correct

unbiased expectations theory

The unbiased expectations theory supports the argument that the yield curve is determined by investor's expectations of future interest rates. This theory says that the long-term interest rates contains an indirect prediction of the short-term interest rates..

two 1 year bonds each of them having a lower interest rates individually compared to that of a one 2 year bond' however due to the compounding interest the unbiased expectations theory predicts the net income would be equal.