Expectations Theory

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Dictionary Says

Definition of 'Expectations Theory'

The hypothesis that long-term interest rates contain a prediction of future short-term interest rates. Expectations theory postulates that you would earn the same amount of interest by investing in a one-year bond today and rolling that investment into a new one-year bond a year later compared to buying a two-year bond today.
Investopedia Says

Investopedia explains 'Expectations Theory'

This theory is sometimes used to explain the yield curve but has proven inaccurate in practice as interest rates tend to remain flat when the yield curve is normal. In other words, expectations theory often overstates future short-term interest rates.

Another term-structure theory, preferred habitat theory, expands on expectations theory to explain why longer-term bonds tend to pay more interest than two shorter-term bonds that add up to the same maturity. It says that investors prefer short-term bonds and are only interested in longer-term bonds if they pay a risk premium. While expectations theory assumes that investors only care about yield, preferred habitat theory assumes they care about maturity as well as yield.
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'Expectations Theory'

  • 7 Controversial Investing Theories

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    ... See Understanding Investor Behavior.) Rational Expectations Theory Rational
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  • The Taylor Rule: An Economic Model For Monetary Policy

    http://www.investopedia.com/articles/economics/10/taylor-rule.asp
    ... the early 1990s with credible assumptions that the Federal Reserve determined future
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  • Interest Rates And Your Bond Investments

    http://www.investopedia.com/articles/03/122203.asp
    ... Can we predict future short-term rates? Well, the expectations theory says that
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  • Lofty Expectations Sink Riverbed, Fortinet And F5

    http://stocks.investopedia.com/stock-analysis/2011/Lofty-Expectations-Sink-Riverbed-Fortinet-And-F5-RVBD-FTNT-FFIV-CSCO-BCSI-CHKP-JNPR0722.aspx
    ... Article; Comments (0). Lofty Expectations Sink Riverbed, Fortinet And F5.
    Posted: Jul 25, 2011 03:00 AM by Stephen D. Simpson, CFA. ...

  • CFA Level 1 Study Guide - Fixed Income Investments - The Term ...

    http://www.investopedia.com/exam-guide/cfa-level-1/fixed-income-investments/interest-rate-term-structure.asp
    ... 4.26 Monetary Policy and Price Level Stability; 4.27 Expectations of Monetary Policy. ...
    The Tradeoff Theory of Leverage; 11.28 Signaling Prospects Through Financing ...

  • Danaher Delivers On High Expectations

    http://stocks.investopedia.com/stock-analysis/2011/Danaher-Delivers-On-High-Expectations-DHR-BRK.A-SI-TMO-PAY-XRAY-GE0726.aspx
    ... Article; Comments (0). Danaher Delivers On High Expectations. Posted:
    Jul 27, 2011 03:00 AM by Stephen D. Simpson, CFA. ...

  • CFA Level 1 Study Guide - Macroeconomics - Expectations of ...

    http://www.investopedia.com/exam-guide/cfa-level-1/macroeconomics/expectations-monetary-policy.asp
    ... 4.26 Monetary Policy and Price Level Stability; 4.27 Expectations of Monetary Policy. ...
    The Tradeoff Theory of Leverage; 11.28 Signaling Prospects Through Financing ...

  • Financial Physics: "Natural" Market Laws

    http://www.investopedia.com/articles/economics/09/financial-physics-laws-economy.asp
    ... Earnings can fall 3% below analysts' expectations but still represent a 5% increase,
    or even exceed expectations simply by posting a lower-than-expected loss ...

  • Invest Like A Pro

    http://www.investopedia.com/articles/financial-theory/09/invest-like-a-pro.asp
    ... In order for an investment philosophy to be sound, it needs to be based on reasonable
    expectations, assumptions of how historical information can serve as a ...

  • The Globalization Of Financial Services

    http://www.investopedia.com/articles/financial-theory/09/risk-free-rate-return.asp
    ... 16 2009 | Filed Under ยป Banking, Economics, Financial Theory, Insurance. ... Understanding
    the individual client's needs and expectations; Providing customer ...

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