Some researchers believe the expectations theory needs to be modified in order to reflect
A)liquidity premiums.
B)that lenders may have some preference for either long- or short-term securities and hence not be indifferent between the two.
C)the tendency of borrowers to prefer longer term securities so they don't have to issue and reissue short term securities.
D)All of the above are true.

Question

Quizplus · Accepted Answer

The expectations theory suggests that long-term and short-term interest rates are directly related to the expected future short-term interest rates. However, some researchers believe that this theory needs to be modified to reflect other factors such as liquidity premiums, lender preferences, and borrower preferences. Liquidity premiums refer to the extra yield investors may require to hold longer-term securities because of the risk of not being able to sell them quickly in the market. Lenders may have a preference for either long- or short-term securities which can affect the interest rates. Borrowers may prefer longer-term securities so they can avoid issuing and reissuing short-term securities. Therefore, all of the above factors need to be considered for a more accurate explanation of interest rate behavior.

Some Researchers Believe the Expectations Theory Needs to Be Modified