Using R to represent an average interest rate is
A) an acceptable practice in the short run, because all interest rates on many different types of securities tend to move up and down together.
B) a questionable practice in the short run, because securities with different risks pay different returns.
C) a questionable practice in the long run, because term structure variations between short- and longer-term rates can be important.
D) an acceptable practice in the long run, because short- and long-term rates on most securities tend to move in tandem.
E) a and c.

Question

Quizplus · Accepted Answer

Using a single average interest rate, R, as a representation can be acceptable in the short run because interest rates on various securities often move together, making it a practical simplification. However, in the long run, this practice becomes questionable due to the term structure variations between short- and long-term rates, which can significantly impact financial decisions and analyses.

Using R to Represent an Average Interest Rate Is