How expectations are formed is important because expectations influence
A) the demand for assets.
B) bond prices.
C) the risk structure of interest rates.
D) the term structure of interest rates.
E) all of the above.

Question

Quizplus · Accepted Answer

Expectations play a crucial role in determining various factors in the financial market. They affect the demand for assets as investors make investment decisions based on their expectations of future returns. This, in turn, impacts bond prices as bondholders adjust their prices based on perceived risks and returns. The risk structure of interest rates is also influenced by expectations as it determines the difference in interest rates between different bonds with different levels of risks. Finally, expectations influence the term structure of interest rates as investors choose between short-term and long-term investments based on their expectations of future economic conditions. Therefore, all of the options listed above are affected by expectations.

How Expectations Are Formed Is Important Because Expectations Influence