Question

In: Finance

17. If investors feel that half of the time future spot rates will rise and half...

17. If investors feel that half of the time future spot rates will rise and half of the time they will decline, the liquidity preference theory

(a) shows the average yield curve will be flat.

(b) does not explain the declining yield curve situation.

(c) supports the majority of yield curves will be declining.

(d) is not valid.

(e) suggests there will be a majority of upward sloping yield curves.

18. The theory that states yield curve slope is formed by the relationship of supply and demand curves for various security maturities is:

(a) liquidity preference theory.

(b) term structure theory.

(c) market segmentation theory.

(d) risk minimization theory

(e) unbiased expectations theory.

Solutions

Expert Solution

17. If investors feel that half of the time future spot rates will rise and half of the time they will decline, the liquidity preference theory, suggests there will be a majority of upward sloping yield curves. The liquidity preference theory states that the investors usually demand a higher rate of interest or a maturity risk premium on securities with long-term maturities which results in a upward sloping yield curve for majority of the time irrespective of the future spot rates.


Read more: Liquidity Preference Theory https://www.investopedia.com/terms/l/liquiditypreference.asp#ixzz5BV7O7I3y
Follow us: Investopedia on Facebook

18. Market Segmentation Theory states that the yield curve slope is formed by supply and demand curves for various maturities .i,e. debt instruments of different maturities.This resulting difference in the supply and demand in each of the market segment results in the difference in prices of the bonds and thus the yields.


Related Solutions

Investors who believe that interest rates will rise most likely prefer to invest in: A) inverse...
Investors who believe that interest rates will rise most likely prefer to invest in: A) inverse floaters B) fixed-rate bonds C) floating-rate notes.
Given the following spot rates and assuming the bonds and the time periods are semi-annual: Time...
Given the following spot rates and assuming the bonds and the time periods are semi-annual: Time Spot Rate 1 3.00% 2 3.30% 3 3.50% 4 3.90% 5 4.40% 6 4.75% 7 4.95% 8 5.05% 9 5.15% 10 5.25% 11 5.40% 12 5.50% 13 5.60% 14 5.65% 15 5.75% 16 5.80% 1.What is the price of a 4% coupon bond maturing in 5 years? 2. What is the YTM on the above bond? 3. What is the implied forward rate on...
             If rates are expected to increase in the future, should investors invest in long-term bonds...
             If rates are expected to increase in the future, should investors invest in long-term bonds or short-term bonds (or other short-term securities now) now (i.e., today)? Explain.
Changes in the spot rates can: a. affect a firm's present value of future cash flows,...
Changes in the spot rates can: a. affect a firm's present value of future cash flows, posing economic risk. b. impose translation risk on a firm. c. impose accounting risk on a firm. d. affect the value of a company's future cash transactions, posing transaction risk.
When investors are very pessimistic about the future, investment is not sensitive to interest rates. How...
When investors are very pessimistic about the future, investment is not sensitive to interest rates. How does this affect the IS curve? If the government intends to stimulate the economy, which policy (monetary/ fiscal) will be effective in this case and which will be not? Explain using the LM/IS diagram.
You are given the following spot rates: Time Spot Rate 0.25 2.2% 0.50 2.8% 0.75 3.1%...
You are given the following spot rates: Time Spot Rate 0.25 2.2% 0.50 2.8% 0.75 3.1% 1.0 3.7% Consider a one-year interest rate swap with a notional value of 3000. Determine the swap interest rate per quarter.
Consider a 1550 nm laser diode with a rise time of 0.8 ns, spectral half-width of...
Consider a 1550 nm laser diode with a rise time of 0.8 ns, spectral half-width of 6 nm, that launches 2 mW optical power into a 60 km long single-mode fiber with an attenuation of 0.3 dB/km. The intramodal dispersion is 3 ps/nm.km. An InGaAs APD with a -32 dBm sensitivity is used at 2.5 Gb/s (NRZ coding). A short optical jumper cable at each end of the cable with a loss of 3 dB is used to connect the...
There are important relationships between Interest Rates and Time as it relates to Future Value: For...
There are important relationships between Interest Rates and Time as it relates to Future Value: For a given Interest Rate, what is the impact on Future Value if the Time Period is longer and for a given Time Period, what is the impact on Future Value if the Interest Rate is higher?
​​​​​​Q .17 At the same time as the RBA is reducing interest rates the Australian Government...
​​​​​​Q .17 At the same time as the RBA is reducing interest rates the Australian Government will be running a budget deficit in 2020. How this will affect aggregate demand? A diagram would assist your answer here and attract further marks How will the size of the marginal propensity to consume affect the size of the multiplier and how will this impact on this fiscal policy initiative? If consumers decide to increase their rate of savings due to increasing uncertainty...
2. Given expectations Ee of future exchange rates, when foreign interest rate fall significantly, investors will...
2. Given expectations Ee of future exchange rates, when foreign interest rate fall significantly, investors will ____ domestic assets, _____ domestic currency, ____ foreign currency, and _____ foreign assets. A)         sell; sell; buy; buy                      B)         sell; buy; sell; buy C)         buy; sell; buy; sell D) buy; buy; sell; sell Can you explain it in detail?
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT