Question

The expectations theory of the term structure of interest rates states that forward rates are determined by investors' expectations of future interest rates. All of the options are correct. yields on long- and short-maturity bonds are determined by the supply and demand for the securities. forward rates exceed the expected future interest rates. None of the options are correct.

Answer 1

forward rates are determined by investors' expectations of future interest rates.

Step-by-step explanation:

The expectations theory of the term structure of interest rates states that forward rates are determined by investors' expectations of future interest rates. It suggests that the predicted holding period rate of return of a bond of "x" number of time is equal to the short-term interest rate irrespective of its maturity.

The Expectations theory gives us the opportunity to predict the future outcome of short-term interest rates based on current long-term interest rates.