Proponents of the preferred habitat theory of term structure assume that a sharp reduction in the supply of one-year securities will
A) decrease the yield on one-year securities.
B) shift the yield curve upward.
C) increase the yield on one year securities.
D) have no effect on the yield on one-year securities.

Question

Quizplus · Accepted Answer

The preferred habitat theory suggests that investors have specific maturity preferences and will only change maturities if compensated by higher yields. A sharp reduction in the supply of one-year securities would increase their price due to higher demand from those with a preference for this maturity, leading to a decrease in their yield.

Proponents of the Preferred Habitat Theory of Term Structure Assume