Why is it unlikely that the expectations theory alone is the correct theory for explaining the...

Why is it unlikely that the expectations theory alone is the correct theory for explaining the yield curve?

Expert Solution

Expectations yield to tell us about the future expectations.

It also tell us about the future interests. It is also known as unbaised theory.

In this theory the short run interest rate is linked to long-term interest rate.

The interest rate depends on the amount of investment which is being set by the financial institution. The theory provides that the investor earns the same amount of interest in the bond of one year plan.

Sometimes it happens that theory is sometimes non practical because the interest rate is typically stable when the yield curve is normal. This theory is known as to overr estimate the short term interest rate. With the maturity time of premium the interest rate tend to increase in respect to time depending on the market risk taken by financial bodies.

yield curve and term structure are the two way of saying the same thing .

The theory is surrounded by the financial institution and interest rate in respect to the time boudations.

Rahul Sunny answered 2 years ago

For this discussion, assume that rational expectations theory is correct and that monetary policy is most...

For this discussion, assume that rational expectations theory is correct and that monetary policy is most effective in changing the economy when it catches people and businesses by surprise. Given this, should short-term data on the economy and on monetary policy targets be published? Defend your answer using the rational expectations theory.

73. Past inflation alone determines expectations about future inflation according to which theory Group of answer...

73. Past inflation alone determines expectations about future inflation according to which theory Group of answer choices (a) adaptive expectations. (b) rational expectations. (c) asymmetric expectations. (d) erratic expectations. (e) all of the above. Flag this Question Question 741 pts 74. The extreme application of rational expectations leads to which of the following conclusions: Group of answer choices (a) inflation can be ended without a recession. (b) intentional government efforts to increase output and reduce unemployment through manipulating aggregate demand...

Use equations and argument to reveal why the Quantity Theory of Money is unlikely to hold...

Use equations and argument to reveal why the Quantity Theory of Money is unlikely to hold on a consistent basis (the argument Keynes made is an example of how to do this).

5. Pure expectations theory The pure expectations theory, or the expectations hypothesis, asserts that long-term interest...

5. Pure expectations theory The pure expectations theory, or the expectations hypothesis, asserts that long-term interest rates can be used to estimate future short-term interest rates. 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. False True The yield on a one-year Treasury security is 4.4600%, and the two-year Treasury security...

6. Pure expectations theory The pure expectations theory, or the expectations hypothesis, asserts that long-term interest...

6. Pure expectations theory The pure expectations theory, or the expectations hypothesis, asserts that long-term interest rates can be used to estimate future short-term interest rates. The yield on a one-year Treasury security is 4.9200%, and the two-year Treasury security has a 6.6420% yield. Assuming that the pure expectations theory is correct, what is the market’s estimate of the one-year Treasury rate one year from now? (Note: Do not round your intermediate calculations.) 9.5672% 10.6582% 7.1335% 8.3923% Recall that on...

Suppose the pure expectations theory of the term structure is correct. You can buy a 2-year...

Suppose the pure expectations theory of the term structure is correct. You can buy a 2-year discount bond with a face value of $1500 for $1360.54. You plan to sell it next year for a price you expect will be $1456.31 a. What is the annual rate of return on 2-year bonds? Explain? b. What is the rate of return on a 1-year discount bond you expect will hold next year? Explain. c. What is the rate of return on...

Suppose the pure expectations theory of the term structure is correct. You can buy a 2-year...

Suppose the pure expectations theory of the term structure is correct. You can buy a 2-year discount bond with face value of $1500 for $1360.54. You plan to sell it next year for a price you expect will be $1456.31. a. what is the annual rate of return on 2-year bonds? Explain. b. What is the rate of return on 1-year discount bonds you expect? will it hold next year? explain. c. What is the rate of return on 1-year...

State the expectations theory and explain its significance. Using the generalized equation of the expectations theory...

State the expectations theory and explain its significance. Using the generalized equation of the expectations theory of the term structure of interest rates, calculate today's four-year rate, assuming that the current one-year, 6% rate is expected to rise by one percentage point in each of the next three years.

What is the Huckel Theory and what is it explaining?

1. Describe the criticisms of the rational expectations theory.

Question

Why is it unlikely that the expectations theory alone is the correct theory for explaining the...

Solutions

Expert Solution

Related Solutions

For this discussion, assume that rational expectations theory is correct and that monetary policy is most...

73. Past inflation alone determines expectations about future inflation according to which theory Group of answer...

Use equations and argument to reveal why the Quantity Theory of Money is unlikely to hold...

5. Pure expectations theory The pure expectations theory, or the expectations hypothesis, asserts that long-term interest...

6. Pure expectations theory The pure expectations theory, or the expectations hypothesis, asserts that long-term interest...

Suppose the pure expectations theory of the term structure is correct. You can buy a 2-year...

Suppose the pure expectations theory of the term structure is correct. You can buy a 2-year...

State the expectations theory and explain its significance. Using the generalized equation of the expectations theory...

What is the Huckel Theory and what is it explaining?

1. Describe the criticisms of the rational expectations theory.