The pure expectations theory of interest rates will hold true over the next seven (7) years.........

The pure expectations theory of interest rates will hold true over the next seven (7) years...... Arguing FOR the topic.

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Expert Solution

In the term structure it is stated that the curve will be upward sloping means the interest rates increases with the increase in the time period or maturity of bond due to high expectations of the investors.Usually the shape of yield curve depends on two factors for the bonds:

1)Risk of security

2)Expectation about inflation.

The pure expectation theory states that the bond traders assume the interest rate and bond prices on the basis of expectation for interest rate and do not consider the maturity of bond as a major factor because they do not think long term bonds as more risky than short term bonds.

According to the pure expectation theory the short term interest rates will be equal to current long term interest rates ,so investor assume to get same interest rate if reinvested after on year maturity bond rather than investing in 2 year maturity bond.So same will be for 7 year maturity bond if reinvested after 6 years.

jeff jeffy answered 1 year ago

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