The investment strategy of borrowing at a low short-term interest rate and using the borrowed funds to invest at a higher long-term interest rate is called
A) arbitrage.
B) interest carry trade.
C) risk structure.
D) liquidity premium.

Question

Quizplus · Accepted Answer

This strategy is known as the interest carry trade, where the investor borrows funds at a low interest rate (short-term) and invests them in higher-yielding assets (long-term). The difference between the two interest rates is the carry or return on investment. Arbitrage involves taking advantage of market inefficiencies to make a riskless profit, while risk structure refers to the relationship between interest rates and bond yields. Liquidity premium relates to the additional return investors demand for holding less liquid securities. Therefore, the best choice is B.

The Investment Strategy of Borrowing at a Low Short-Term Interest