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How are upward-sloping yield curves explained by the Pure Expectations Theory?
- There are separate markets for long-term and short-term securities, and the
long-term market demands greater returns. - Future interest rates are expected to rise.
- Investors in long-term securities demand a risk premium for tying their
money up longer.
- There are separate markets for long-term and short-term securities, and the
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The three major term structure theories are summarized below from the perspective of an upward-sloping yield curve:
- Pure Expectations Theory – Future interest rates are expected to rise.
- Liquidity Preference Theory – Investors in long-term securities demand a risk premium for tying their money up longer.
- Market Segmentation Theory – There are separate markets for long-term and short-term securities, and the long-term market demands greater returns.
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