According to modern term structure theory, which of the following is not represented in the term structure of interest rates?
A) A liquidity premium.
B) A coupon rate premium.
C) An interest rate risk premium.
D) A default premium.
E) A real rate of interest.

Question

Quizplus · Accepted Answer

Modern term structure theory suggests that the term structure of interest rates is determined by the market expectations of future short-term interest rates and the risk premiums that investors demand for investing in bonds with different maturities. A coupon rate premium, which is the difference between the coupon rate and the prevailing market interest rates, is not considered a factor that determines the term structure of interest rates.

According to Modern Term Structure Theory, Which of the Following