Demonstrate the reasons why interest rates may differ between loans of different maturity based on expectations...

Demonstrate the reasons why interest rates may differ between loans of different maturity based on expectations theory, market segmentation theory, and liquidity preference theory?

Expert Solution

Interest rate will be different between the loans of different maturity due to expectations theory because people are often inclined to invest into the shorter term securities because these short term securities are offering with an adequate rate of interest along with lower risk due to lower duration and these investors will be demanding a premium for the investment into the longer term securities so interest rates are different of different maturity because of expectation theory.

Market segmentation theory states that the the rates of interest for different securities will be different for different duration, because there is a segregation of the markets for them and the securities are often demanded by the various kinds of companies who have appropriate need for them, so they will be accepting a different rate of interest for different maturity of securities

liquidity preference theory will be stating that investor would be more preferring to invest into the liquid securities which are for short term and there would be a difference in the interest rate which will be offered for this shor term securities and the longer term securities due to Liquidity difference.

jeff jeffy answered 1 year ago

Explain the reasons why interest rates can be different in different countries.

Bank provides 5 different loans. The types of these loans and monthly interest rates are given...

Bank provides 5 different loans. The types of these loans and monthly interest rates are given below. Type Of Credit Percentage Of Interest(month) A (commercial) 5.5 B)(home) 3.5 C (auto) 5 D (House 2) 4.5 E (short term)) 6 The bank can give credit £ 100 million. The goal is to maximize interest income But have some obligations about the loans: Credit C cannot be more than 25% of credit B. Credit A can be given up to a maximum...

Problem in Forecasting Interest Rates based on unbiased expectations theory: These are the rates today (June...

Problem in Forecasting Interest Rates based on unbiased expectations theory: These are the rates today (June 15, 2018) for loans of equal risk. R1 = 2%; R2 = 3% R3 = 4% R4 = 5% A. Given this information, calculate one-year forward rate for a one-year loan beginning 6/15/19 and ending on 6/15/20 B. Calculate the two-year forward rate for a one-year loan beginning 6/15/20 and ending on 6/15/21 C. Calculate the three-year forward rate for a one-year loan beginning...

What, then is the rational expectations theory of interest rates? How does it differ from earlier...

What, then is the rational expectations theory of interest rates? How does it differ from earlier interest-rate determination theories, such as The Classical, Liquidity Preference and Loanable Funds ideas?

Problem in forecasting interest rates based on unbiased expectations theory. These are spot rates today (Oct....

Problem in forecasting interest rates based on unbiased expectations theory. These are spot rates today (Oct. 9, 2020) R1= 12%, R2=13%, R3=14%, R4=15% A. Given this information calculate one year forward ratefor a one yr loan beginning 10/9/21 and ending 10/9/22. B. calculate two year forward ratefor a one yr loan beginning 10/9/22 and ending 10/9/23. C. calculate three year forward ratefor a one yr loan beginning 10/9/23 and ending 10/9/24. D. calculate two year forward ratefor a two yr...

Give two reasons why interest expense may vary across different banks:

why do different kind of bonds have different levels of interest rates? why do interest rates...

why do different kind of bonds have different levels of interest rates? why do interest rates increase and decrease over time? describe in detail the yeild curve and the expectation hypothesis.what does the yeild curve look like in the current economic environment ? if the yeild curve is steep, how would that affect your borrowing and investing decisions? need it ASAP

6. International Money Markets a) Why interest rates are different between different countries. Discuss all the...

6. International Money Markets a) Why interest rates are different between different countries. Discuss all the relevant factors with giving examples from current interest rates. b) How can individual countries achieve and maintain lower interest rates. Provide specific policy examples. c) What are the positive and negative effects of FED’s zero interest rate policy. How do you think this has affected dollar during 2020 amid Covid-19 pandemic?

Consider the market for wheat. Most farmers have loans that are based on flexible interest rates...

Consider the market for wheat. Most farmers have loans that are based on flexible interest rates (i.e. they change with the market rate). Starting off from equilibrium, demonstrate graphically (and write into a table) what happens to P,Q,q, and Profits in the short-run, and long-run, if the interest rate decreases. Provide explanation please!

Explain why Car loans(Auto Loans), Mortgage, and Credit Card are so different in terms of interest...

Explain why Car loans(Auto Loans), Mortgage, and Credit Card are so different in terms of interest offering based on the formula components, such as Risk Free Rate, Inflation Premium, Default Risk Premium, Maturity Risk Premium and Liquidity Premium. You need to relate those components with the length/duration of lending period, and types of collateral, like housing for Mortgage, vehicle for Auto loans and none for credit card. Use your own thought, opinion and other information you found online.

Question