The theory suggesting that for any given issuer, long-term interest rates tends to be higher than short-term rates is called ________.
A) expectation hypothesis
B) liquidity preference theory
C) market segmentation theory
D) interest parity theory

Question

Quizplus · Accepted Answer

The theory suggesting that long-term interest rates are higher than short-term rates due to investors preferring more liquid short-term investments over long-term ones is known as the liquidity preference theory. The expectation hypothesis suggests that long-term rates are an average of expected short-term rates, while the market segmentation theory posits that investors have preferences for specific maturities and are not willing to switch. The interest parity theory states that differences in interest rates between two countries are offset by changes in currency exchange rates.

The Theory Suggesting That for Any Given Issuer, Long-Term Interest