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?

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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 1 year ago

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