Local expectations theory

Local expectations theory

A form of the pure expectations theory that suggests that the returns on bonds of different maturities will be the same over a short-term investment horizon.

Local Expectations Hypothesis

A theory that bonds identical in every way except the length of maturity will have the same rate of return over a holding period. That is, if an investor buys the same amount of two bonds, each paying 5% interest payable twice per year but with one having a maturity of 10 years and the other 15, the investor will receive the same return from each bond if he/she holds both for the same amount of time. This is because the coupon payments are identical for both bonds, and coupons form the bulk of a bond's return.
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