Expectations hypothesis,

Definition of Expectations hypothesis:

1. Mathematical formula used to predict upcoming interest rates. If RS is the one year interest rate, RL is the two year interest rate - and the next years short term interest rate is predicted with RS*t+1, then the expected return to one and two year investments are equal if the following equation is true:

   (1 + RLt)2 = (1 + RSt) ( 1 + RS*t+1).