My book (Financial Markets and Institutions, Mishkin et al.) treats returns and interest rates as the same thing while explaining the expectations theory in Chapter 5. However, in the previous chapter the book had stated that return = C/Pt + (Pt+1-Pt)/Pt.

Here's an example from the book: enter image description here enter image description here

The question says interest rates but the solution talks in terms of returns even though they are not the same.


1 Answer 1


There is no specific terminology in the expectations theory. The terms of art have the same meaning.

If the holding period is equal to the time to maturity then the rate of return is equal to the yield to maturity. Simply put, if you don’t sell the bond, the capital gains will always be $0$.


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