The _________ theory states that the shape of the yield curve reveals the financial market's projection of future interest rates.
A) modern term structure
B) expectations
C) maturity preference
D) preferred habitat
E) market segmentation

Question

Quizplus · Accepted Answer

The expectations theory states that the shape of the yield curve reflects market expectations of future interest rates. The modern term structure theory suggests that interest rates on long-term bonds are an average of short-term interest rates expected to occur over the life of the long-term bond, while the maturity preference theory states that investors prefer short-term bonds to long-term bonds. The preferred habitat theory suggests that investors have specific maturity preferences based on factors like tax considerations, while the market segmentation theory suggests that different investors focus on specific segments of the bond market.

The _________ Theory States That the Shape of the Yield