3) Match each of the following statements with the theory of the term structure

Question

3) Match each of the following statements with the theory of the term structure of interest rates with which it is (8pts) most consistent. The longer the term to maturity of a bond the higher is its risk premium. long term interest rates are the average of expected short term rates. A flat yield curve indicates that people expect short-term interest rates to fall. A flat yield curve indicates that people expect short-term interest rates to remain Select One expectations hypothesis expectations hypothesis liquidity premium theory expectations hypothesis liquidity premium theory liquidity premium theory liquidity premium theory expectations hypothesis constant. This theory can't explain why the yield curve is usually upward-sloping. Bonds of different maturities are perfect substitutes for one another. This theory is consistent with all three empirical facts about the yield curve. Bonds of different maturities are substitutes but not perfect substitutes. Select One Select One Select One

Explanation / Answer

1. Liquidity premium theory

2. Expectations hypothesis

3. Liquidity premium theory

4. Expectations hypothesis

5. Expectations hypothesis

6. Liquidity premium theory

7. Liquidity premium theory

8. Expectations hypothesis

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