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Suppose the following interest rates are given: one-year spot rate. y1, is 1.25% two-year spot rate, y2, is 2.50% three-year spot rate, y3, is 3.75%
Suppose the following interest rates are given: one-year spot rate. y1, is 1.25% two-year spot rate, y2, is 2.50% three-year spot rate, y3, is 3.75% four-year spot rate, y4, is 5% Based on the expectation hypothesis, which of the following explanations about the shape of the term structure is correct? Select one: A. Investors on average expect the interest rate to increase in the future. B. Investors on average expect the interest rate to decrease in the future. C. Investors on average do not have preferred investment horizons and expect the interest rate not to change in the future. D. Investors on average have relatively long investment horizons, and require a premium to hold relative short-term bonds. E. Investors on average have relatively short Investment horizons, and require a premium to hold relative long-term bonds
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