When the yield curve slopes upward: Yields on 30-year Treasury bonds are greater than those on seven-year notes, which are in turn greater than those on six-month bills. As all Treasury securities have the same default risk, liquidity, and tax treatment, should you invest all your money in the 30-year bonds according to the expectations theory?
Expectation theory advocates that an investor earns the same amount of interest by investing into two consecutive 1 year bond investment versus investing in one 2 year bond today so it attempts to predict what short-term interest rate will be in future, based upon current long-term rates.
According to this theory, investor make decision based upon a forecast of future interest rates and the theory use long term rates to forecast the rate for short term bonds.
In this scenario when the yield curve slopes upwards, it means that the expectation of return on longer period bonds are higher than those of shorter period bonds.
According to the expectation theory, one should not be investing all his money into 30 year treasury bonds, because it can just be a forecasting tool for prediction of short term interest rates, and even if the investor is investing into the the various short term bonds for 30 years, he will earn the same amount on investing into the 30 year treasury bond
So, According to tu expectation theory this statement is false because one should not be investing all his money into the long duration bonds as according to this theory both the short-term rate the long-term rate are equivalence even if they are invested through two different bonds.
So, one should not be allocating all his funds into 30 year bond as expectation theory does not advocate for the same.
When the yield curve slopes upward: Yields on 30-year Treasury bonds are greater than those on...
The Treasury yield curve plots the yields on Treasury notes and bonds relative to the of those securities. Group of answer choices Issue date Market price Coupon rate Face value Maturity
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