Question

Write a brief summary of the explantation of the shape of the term structure of interest rates: The Pure Expectations Theory

Answer 1

The term structure of interest rates is the relationship between interest rates or bond yield and different terms or maturities. When graphed the term structure of interest rates is known as a yield curve ,and it plays a central role in an economy. The term structures reflects expectation of market participants about future changes in interest rates and their assessment monetary policy condition.

The expectation hypothesis of the term structure of interest rates ( whose graphical representation is known as the yield curve) is the proposition that the long term rate is determined purely by current and future expected short-term rates,in such way that the expected final value of wealth from investing

Expectation theory attempts to explain the term structure of interest rates .......Expectation theories are predicted upon the idea that investors believe forward rates as reflected by future contracts are indicative of future short term interest rates.

Pure expectation theory. A theory that asserts that forwards rates exclusively represent the expected futures rates. In other words, the entire term structure reflects the markets expectation of future short term rates.

For example ,an increasing slope to the term structure implies increasing short term interest rates...