Unbiased Expectations Theory

Unbiased Expectations Theory – What are the market’s expectations regarding interest rates?

The Unbiased Expectations Theory essentially states that long-term interest rates are determined by the expected short-term interest rates for each subsequent period.

The intuitive reasoning is as follows: if an investor expects that interest rates on one-year bonds will increase in each subsequent period and they can buy one-year bonds each period, then the current spot rate for a five-year bond should ensure a return that is in parity with these expectations.

You can find actual figures about the rates at the following link:

https://markets.ft.com/data/bonds

*Financial Markets and Institutions – by A. Saunders, M. Cornett & O. Erhemjamts