Question
We studied several different theories of the yield curve. Which of the following statements is most likely correct? a. The liquidity premium version of the
We studied several different theories of the yield curve. Which of the following statements is most likely correct?
a. The liquidity premium version of the expectations theory cannot explain a flat term structure of interest rates
b. The pure expectations theory suggests that an upward-sloping term structure of interest rates is a consequence of investors expecting short-term rates to remain unchanged for a period of time, followed by investors expecting short-term rates to rise for a period of time
c. The liquidity premium version of the expectations theory suggests that a downward-sloping term structure of interest rates is due to declining expected short-term rates, and although there is a maturity premium to consider, it is not large enough to offset the expected decline in short-term rates.
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