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The expectations theory and the segmented markets theory do not explain the facts very well,
but they provide the groundwork for the most widely accepted theory of the term structure of
interest rates, ____.
A) the Keynesian theory
B) separable markets theory
C) liquidity premium theory
D) the asset market approach
Answer: C
Diff: 2 Type: MC Page Ref: 124
Skill: Recall
Objective List: 6.2 Explain how interest rates on bonds with different maturities are related
According to the liquidity premium theory of the term structure ____.
A) because buyers of bonds may prefer bonds of one maturity over another, interest rates on
bonds of different maturities do not move together over time
B) the interest rate on long-term bonds will equal an average of short-term interest rates that
people expect to occur over the life of the long-term bonds plus a term premium
C) because of the positive term premium, the yield curve will not be observed to be downward
sloping
D) the interest rate for each maturity bond is determined by supply and demand for that maturity
bond
Answer: B
Diff: 3 Type: MC Page Ref: 124 - 125
Skill: Recall
Objective List: 6.2 Explain how interest rates on bonds with different maturities are related
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.
A) segmented markets theory
B) expectations theory
C) liquidity premium theory
D) separable markets theory
Answer: C
Diff: 2 Type: MC Page Ref: 124 - 126
Skill: Recall
Objective List: 6.2 Explain how interest rates on bonds with different maturities are related