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Question of the Week - Fixed Income

AdaptPrepAdaptPrep Des Moines, IA, USAPosts: 211 Sr Associate
edited March 2016 in Level 1 Questions

How are upward-sloping yield curves explained by the Pure Expectations Theory?

Question of the Week - Fixed Income 17 votes

There are separate markets for long-term and short-term securities, and the long-term market demands greater returns.
0%
Future interest rates are expected to rise.
47%
AdaptPrepStuj79googs1484BeregondgahamiltBlueJay3535dmuller27suls 8 votes
Investors in long-term securities demand a risk premium for tying their money up longer.
52%
arsenal93paulopitaBeregondmdlynch3GelinatorpabulumsaaronpcjbVare27avannoord 9 votes

Comments

  • AdaptPrepAdaptPrep Des Moines, IA, USAPosts: 211 Sr Associate
    Future interest rates are expected to rise.

    The three major term structure theories are summarized below from the perspective of an upward-sloping yield curve:

    Pure Expectations Theory - Future interest rates are expected to rise.

    Liquidity Preference Theory - Investors in long-term securities demand a risk premium for tying their money up longer.

    Market Segmentation Theory - There are separate markets for long-term and short-term securities, and the long-term market demands greater returns.

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