Pure expectations theory
Pure expectations theory (or, simply, expectations theory) is a theory that states that the slope of the yield curve depends on expectations about future inflation rates and interest rates. Thus, if the annual rate of inflation and future interest rates are expected to increase, then the yield curve will be upward sloping; the curve will be downward sloping if the annual rates are expected to decrease.
Definitions
According to Financial Management Theory and Practice by Eugene F. Brigham and Michael C. Ehrhardt (13th edition),
- Expectations theory. States that the slope of the yield curve depends on expectations about future inflation rates and interest rates. Thus, if the annual rate of inflation and future interest rates are expected to increase, then the yield curve will be upward sloping; the curve will be downward sloping if the annual rates are expected to decrease.
According to Fundamentals of Financial Management by Eugene F. Brigham and Joel F. Houston (15th edition),
- Pure expectations theory. A theory that states that the shape of the yield curve depends on investors' expectations about future interest rates.
Related concepts
- Financial management. A combination of enterprise efforts undertaken in order to procure and utilize monetary resources of the enterprise.
