**Statement:** *"According to the expectations theory of the term structure, it is better to invest in one-year bonds, reinvested over two years, than to invest in a two-year bond if interest rates on one-year bonds are expected to be the same in both years."* **Is this statement true, false, or Explain?** --- **Answer:** **The statement is FALSE.** --- **Explanation:** According to the **expectations theory of the term structure of interest rates**, the yield on a long-term bond (such as a two-year bond) will equal the average of the expected short-term interest rates (such as one-year bonds) over the same period. **If the expected one-year interest rate today is the same as the expected one-year interest rate one year from now**, then the two-year bond yield will be equal to that expected one-year rate. - Supposing both expected one-year rates are, say, 5%, then the yield on a two-year bond will also be 5%. - Investing in a one-year bond now (at 5%), and then reinvesting in another one-year bond next year (also at 5%), will give you the same total return as investing in a two-year bond at 5% for two years. **Therefore:** According to the expectations theory, there is **no advantage** in investing in a sequence of one-year bonds versus a two-year bond if the expected one-year interest rates are the same for both years. The expected returns will be identical. **In summary:** - **False** — There is no advantage. Both investment strategies yield the same expected return under the expectations theory, provided that expected short-term rates are unchanged.