The expectations hypothesis assumes that bond investors look ahead and make predictions, or form expectations, about future interest rates. From this perspective, in an efficient market, the return from investing in an N-year bond will be the same as the expected return from rolling over the proceeds (coupons and principal) from maturing one-year bonds into new one-year bonds over the N-year time frame. Thus today’s long-term rates reflect expectations about future short-term rates Although intuitive, the expectations hypothesis does not totally explain the shapes of observed term structures. Historically, the term structure is sloped upward; long-term rates usually are higher than short-term rates. Under the expectations hypothesis the typical upward-sloping term structure implies that the market always expects rising shortterm interest rates. This does not agree with the observed behavior of short-term rates over time. Other explanations for the behavior of the term structure have attempted to correct this flaw.