State the expectations theory of the term structure of interest rates.

Expectations theory:

The expectations theory of the term structure of interest rates specifies that into equilibrium, each long-term rate is a geometric average of today’s short term rate and usual short-term rates in the future.

This theory needs that there is an implicit relationship in between forward rates and current bond yields. The forward rate of interest is the rate of interest which will be payable onto funds beginning at any future date.