Which of the following DOES NOT correctly describe how the various theories of t

Question

Which of the following DOES NOT correctly describe how the various theories of the term structure of interest rates explain a "flat" yield curve?

A. Segmented markets theory: Investors prefer long-term to short-term bonds.

B. Liquidity premium theory: The liquidity premium on medium- and long-term bonds equals zero and expected future short-term rates are constant.

C. Expectations theory: Interest rates are expected to remain steady in the future.

D. Expectations theory: Interest rates are equally likely to fall or rise in the future.

E. Preferred habitat theory: Interest rates are expected to fall moderately in the future

Explanation / Answer

A) is the correct answer

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