Expectations Theory

Expectations theory is a financial theory that suggests that the price of a bond is determined by the market’s expectations of future interest rates. The theory states that investors will buy bonds with higher yields if they expect interest rates to rise in the future, and they will buy bonds with lower yields if they expect interest rates to fall in the future. The theory is based on the idea that investors will always seek to maximize their returns, and that they will adjust their investments accordingly to take advantage of changing market conditions.

History of Expectations Theory

Expectations theory was first proposed by economist John Maynard Keynes in 1936. Keynes argued that the price of a bond is determined by the expected future returns of the bond, rather than its current yield. This theory was later refined by economist Franco Modigliani in 1958, who argued that the price of a bond is determined by the expected future returns of the bond, adjusted for the expected future changes in interest rates. This theory has since become the basis for modern bond pricing models.

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Summary

Expectations theory is a financial theory that suggests that the price of a bond is determined by the market’s expectations of future interest rates. The theory states that investors will buy bonds with higher yields if they expect interest rates to rise in the future, and they will buy bonds with lower yields if they expect interest rates to fall in the future. The theory is based on the idea that investors will always seek to maximize their returns, and that they will adjust their investments accordingly to take advantage of changing market conditions. For more information about this term, you can visit websites such as Investopedia, The Balance, and Investing.com.

See Also

• Interest Rate Risk
• Duration
• Yield Curve
• Credit Risk
• Inflation Risk
• Liquidity Risk
• Market Risk
• Risk-Free Rate
• Real Rate of Return
• Risk Premium

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