In some time periods, there is evidence that corporations initially financed long-term projects with short-term funds. They planned to borrow long-term funds once interest rates were lower. Thisspecifically supports the ____ for explaining the term structure of interest rates.
A) liquidity premium theory
B) expectations theory
C) segmented markets theory
D) A and C

Question

Quizplus · Accepted Answer

This evidence supports the expectations theory, which posits that long-term interest rates reflect investors' expectations of future short-term interest rates. If corporations plan to borrow long-term funds in the future when interest rates are lower, it suggests that they expect short-term rates to decrease in the future.

In Some Time Periods, There Is Evidence That Corporations Initially