Estimating forward rates from the spot rate curve is based on the assumption that the ____ hypothesis accurately describes the shape of the yield curve.
A) expectations
B) liquidity preference
C) liquidity preference.
D) efficient market
E) None of these are correct.

Question

Quizplus · Accepted Answer

Estimating forward rates from the spot rate curve is based on the expectations hypothesis, which assumes that the shape of the yield curve reflects the market's expectations of future interest rates. The liquidity preference theory suggests that longer-term bonds have a higher yield to compensate for the higher risk of holding them, while the efficient market hypothesis assumes that all available information is fully reflected in market prices at all times.

Estimating Forward Rates from the Spot Rate Curve Is Based