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Expectations theory attempts to predict what short-term interest rates will be in the future based on current long-term interest rates. The theory suggests that an investor earns the same amount of interest by investing in two consecutive one-year bond investments versus investing in one two-year bond today.Click to see full answer. Keeping this in view, what is the term structure of interest rate?Essentially, term structure of interest rates is the relationship between interest rates or bond yields and different terms or maturities. When graphed, the term structure of interest rates is known as a yield curve, and it plays a crucial role in identifying the current state of an economy.Furthermore, what are three theories for describing the shape of the term structure of interest rates? Three theories that explain the shape of the term structure of interest rate are the unbiased expectations theory, the liquidity premium theory and the market segmentation theory. Likewise, people ask, what is the pure expectations theory of the term structure? Pure expectations theory. A theory that asserts that forward rates exclusively represent the expected future rates. In other words, the entire term structure reflects the market’s expectations of future short-term rates. For example, an increasing slope to the term structure implies increasing short-term interest ratesWhy is the term structure of interest rates important?The term structure of interest rates is a very important research area for economists. Because, economists and investors believe that the shape of the yield curve reflects the market’s future expectation for interest rates and the conditions for monetary policy.

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