Question

The ________ of the term structure states the following: the interest rate on a long-term bond will equal an average of short-term interest rates expected to occur over the life of the long-term bond plus a term premium that responds to supply and demand conditions for that bond. Question 18 options: A) segmented markets theory B) separable markets theory C) liquidity premium theory D) expectations theory

Answer 1

Answer:

D) expectations theory                    

Explanation:

Expectations theory: The term expectations theory is defined as a process that attempts to forecast or predict the short-term rates that will appear in the future based on the on-going long-term rates of interests. It argues that a particular investor will earn the exact interest amount through investing in two successive one-year investment bonds in relation to investing related to a two-year bond at present.

In the question above, the given statement represents the expectations theory.