As the economy moves through a business cycle,which of the following term structure of interest rates theories describe the shape of the yield curve?

Question

Quizplus · Accepted Answer

The liquidity premium theory, segmentation theory, and expectation hypothesis are the three main theories that describe the shape of the yield curve. The liquidity premium theory suggests that investors require a premium for holding longer-term bonds, which causes the yield curve to slope upwards. The segmentation theory proposes that certain sectors of the market demand different maturities of bonds, resulting in a segmented yield curve. Finally, the expectation hypothesis suggests that long-term interest rates are equal to the expected average of future short-term rates, resulting in a flat yield curve during times of economic stability.

As the Economy Moves Through a Business Cycle,which of the Following