Pure expectations theory


Assuming that the pure expectations theory holds, which of the following statements is CORRECT?

a) If 2-year Treasury bond rates exceed 1-year rates, then the market must expect interest rates to rise.

b) If both 2-year and 3-year Treasury rates are 7%, then 5-year rates must also be 7%.

c) If 1-year rates are 6% and 2-year rates are 7%, then the market expects 1-year rates to be 6.5% in one year.

d) Reinvestment rate risk is higher on long-term bonds, and interest rate price risk is higher on short-term bonds.

e) Interest rate price risk and reinvestment risk are relevant to investors in corporate bonds, but these concepts do not apply to Treasury bonds.

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Business Management: Pure expectations theory
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