According to the expectations theory of the term structure A. the interest rate

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).

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