Final Answer:
The expectations theory of the term structure of interest rates states that long-term interest rates are an average of current and expected future short-term interest rates.
Step-by-step explanation:
The expectations theory posits that the yield on long-term bonds is determined by the market's expectations of future short-term interest rates. According to this theory, investors are indifferent between investing in a series of short-term securities and a single long-term security, assuming the same total holding period.
The long-term interest rates are considered to be an average of current short-term rates and the market's expectations of future short-term rates. If investors expect future short-term rates to rise, long-term rates will be higher than current short-term rates to compensased on the idea that investors are forward-looking and make investment decisions based on their expectations of future interest rate movements.