Which of the following statements is most correct?
A)the liquidity preference theory holds that interest rates are determined by the supply of and demand for loanable funds.
B)the loanable funds theory and the liquidity preference theory are incompatible with each other because one is right and the other is wrong.
C)finding the yield to maturity on a corporate bond is comparable to finding the internal rate of return.
D)the market segmentation theory holds that securities of different maturities are perfect substitutes for each other.

Question

Quizplus · Accepted Answer

Finding the yield to maturity on a corporate bond is comparable to finding the internal rate of return because both calculations involve a discount rate that equates the present value of cash flows to the initial investment. The liquidity preference theory and loanable funds theory are not necessarily incompatible, they simply focus on different aspects of interest rate determination. The market segmentation theory does not hold that securities of different maturities are perfect substitutes for each other, but rather that investors have preferences for certain maturities and will only invest in those securities.

Which of the Following Statements Is Most Correct