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March 25, 2017

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Some analysts believe that the term structure of interest reates is determined by the behavior of various types of financial institutions. this theory is called the:

A. expectations hypothesis
B. segmentation theory
C. liquidity premium theory
D. theory of industry supply and demand for bonds

The structure of interest rates is also know as the yield curve, so I like the expectations theory (A)

  • finance (structure of interest rates) - ,

    In most environments the interest rate on bonds is high for long term bonds and lower for short term bonds. This is because in theory people are more nervous about lending money for longer periods of time because "anything might happen" in thirty years but if I loan the company the money for only one year I am more likely to get it back. Therefore I want higher interest for the long term bond. That sort of sounds like "expectations" to me, but I have no experience with this terminology.

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