Question

Based on the pure expectations theory, is the following statement true or false?

The pure expectations theory assumes that a one-year bond purchased today will have the same return as a one-year bond purchased five years from now.

a. True
b. False

Answer 1

The correct answer is letter "B": False.

Step-by-step explanation:

The Pure Expectations Theory uses long-term interest rates to predict future interest rates in the short run. Investors consider different investments to predict future interest rates. In the example, the statement indicates the opposite. It is taking a short-term interest rate (one-year bond), to calculate the return of a long-term investment (five-year bond).