Hi

@Branislav Did i say that, I must have said that somewhere?

Well, our baseline but unrealistic theory of the term structure is

**pure expectations**. Pure expectations says that forward rates predict future spot rates without any other factors. So if the current, say, six month spot (interest) rate is 2.0% and the predicted future spot rate is also 2.0%, then the forward rate must be 2.0% because it represents the "pure expectation" of the future spot rate. In this case, the forward rate curve must be flat, and so too therefore, the spot rate curve. So imagine we are in this world, where today the spot rate is 2.0% and next month, quarter and year, the spot rate will also be 2.0%. In a world where the future spot rate is constant and where pure expectations applies, the term structure must be flat (cannot be upward sloping).

Now introduce some upward slope to the term structure: upward slope in the spot rates implies even greater upward slope in the forward rates. Now our forward rates are predicting future spot rates greater than 2.0%. But if the term structure is static, then our short term six-month spot rate remains at 2.0%; e.g., if we go forward in time one year, the six-month spot rate will still be 2.0% yet the term structure is upward sloping (i.e., this is the assumption of

*unchanged term structure* )! What happened? the greater-than-2.0% forward failed to exactly predict the realized 2.0% short rate. Why did it over-estimate? Because investors must have imposed a risk premium. Put another way, If the term structure is upward sloping starting at 2.0%, then the forward rates must be higher than 2.0%, and if pure expectations applies, then the future spot rate must go higher than 2.0%. If they do not, the pure expectations failed to account for everything.

So I am not sure exactly how/where I voiced it, but what I think i meant is: under an

**assumption of unchanged term structure**, and where the

*term structure happens to upward-sloping*, the upward slope must be explained by a risk premium demanded by investors.

I hope that's helpful,

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