Which of the following statements is CORRECT?

Question

BlackTom AI · Accepted Answer

Question restatement: The prompt asks which statement is CORRECT among the given options. The provided data includes only one option and no list of alternative statements to compare.

Analysis of the available option: The statement provided is: 'The pure expectations theory states that the maturity risk premium for long-term Treasury bonds is zero and that differences in interest rates across different Treasury maturities are driven by expectations about future interest rates.'

Evaluation of the claim:
- According to the Pure Expectations Theory, the forward (expected) path of short-term interest rates determines the observed long-term rates. A key feature of this theory is that it assumes there is no term (maturity) premium or liquidity premium; hence, long-term rates are the average of expected future short-term rates, implying the maturity risk premium is zero within this framework.
- Therefore, the part of the statement claiming that the maturity risk premium is zero aligns with the core assertion of the Pure Expectations Theory, and the idea that differences in rates across maturities arise from market expectations about future rates also aligns with the theory.

Potential gaps or contexts to consider:
- In practice, many economic models incorporate a term premium (as in the Liquidity Preference Theory or the Current Term Structure models), which would contradict the idea that the maturity risk premium is zero. However, within the strict Pure Expectations framework, the absence of a term premium is a defining assumption, so the statement is consistent with that theory.
- The statement does not address alternative theories directly; it simply asserts a claim that is characteristic of the Pure Expectations Theory.

Conclusion about correctness of the single provided option:
- Given the statement described, it accurately reflects the core tenet of the Pure Expectations Theory regarding a zero maturity risk premium and rate differences driven by expected future rates. Since there are no other options to compare, this statement stands as the correct option within the provided content.

Which of the following statements is CORRECT?

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