Expectation Theory

The theory states here that the yield curve depends on the expectation concerning with future inflation rates. The rate on long-term bonds will exceed, If inflation rate is expected to increase so that of short-term loan. The expected future interest rates are equivalent to forward rates computed from the expectations along with future interest rates are. Another factor that affects the expectations along with regard to future interest rates are:

• Other economic related factors including social factors.
• Fiscal policy of the government or like government expedition
• Monetary policy of the government
• Political stability