Assess the following statements: The traditional liquidity premium theory states that long term interest rates are greater than the average of expected future interest rates. According to the market segmentation theory short term investors will not normally switch to intermediate or long term investments. The liquidity premium theory of interest rates states that the term structure must always be upward sloping. The liquidity premium theory of interest rates states that investors are indifferent between different maturities if the long term spot rates are equal to the average of current and expected future short term rates. a. Two statements are correct. b. Three statements are correct. c. Only one statement is correct. d. Four statements are correct.

Assess the following statements: The traditional liquidity premium theory states that long term interest rates are greater than the average of expected future interest rates. According to the market segmentation theory short term investors will not normally switch to intermediate or long term investments. The liquidity premium theory of interest rates states that the term structure must always be upward sloping. The liquidity premium theory of interest rates states that investors are indifferent between different maturities if the long term spot rates are equal to the average of current and expected future short term rates. a. Two statements are correct. b. Three statements are correct. c. Only one statement is correct. d. Four statements are correct.

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter7: International Arbitrage And Interest Rate Parity

Section: Chapter Questions

Problem 4BIC

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Which one of the following statements about the term structure of interest rates is true?a. The expectations hypothesis indicates a flat yield curve if anticipated future short-term rates exceed current short-term rates.b. The expectations hypothesis contends that the long-term rate is equal to the anticipated short-term rate.c. The liquidity premium theory indicates that, all else being equal, longer maturities will have lower yields.d. The liquidity preference theory contends that lenders prefer to buy securities at the short end of the yield curve.
Which of the following is correct with regards to Theories of Term Structure? When the shape of the yield curve depends on investors’ expectations about prospective prevailing interest rates, the Pure Exception Theory is being applied. When the economic outlook is improving, the yield curve inverts as it reflects no changes in inflation premium. The liquidity preference theory suggests that long-term rates are generally higher than short-term rates since investors perceive more liquidity in long-term investments. Under the Market segmentation theory, there is an apparent relationship between the yield curve and the prevailing rate of returns in each market segment.
Which one of the following statements about the term structure of interest rates is true? A) The expectations hypothesis predicts a flat yield curve if anticipated future short-term rates exceed current short-term rates. B) The liquidity premium theory contends that lenders prefer to buy securities at the ghort-term end of the curve. C) The expectations hypothesis contends that the long-term spot rate is equal to the short-term rate. D) The liquidity premium theory indicates that, all else being equal, longer maturity bonds will have lower yields.
At any point in time forward rates computed by the yield curve represent the market's best estimates about the future course of short-term interest rates. Hence, for an individual investor who has a one-period investment horizon, it makes no difference what the term to maturity is on the individual security purchased. True/false?
Determine whether the following statements are TRUE or FALSE. Briefly explain your answers. (a) “When a consol is priced above its par value, the yield to maturity equals coupon rate.” (b) "If the actual inflation rate is higher than expected, both borrowers and lenders will lose"
Some characteristics of the determinants of nominal interest rates are listed as follows. Identify the components (determinants) and the symbols associated with each characteristic: Characteristic Component Symbol This is the premium that reflects the risk associated with changes in interest rates for a long-term security. It changes over time, depending on the expected rate of return on productive assets exchanged among market participants and people’s time preferences for consumption. This premium is added when a security lacks marketability, because it cannot be bought and sold quickly without losing value. It is calculated by adding the inflation premium to r*. Over the past several years, Germany, Japan, and Switzerland have had lower interest rates than the United States due to lower values of this premium. It is based on the bond’s rating; the higher the rating, the lower the premium added, thus lowering…
Consider the following scenario analysis A. Is it reasonable to assume that treasury bonds will provide higher returns in recessions than in booms? B. Calculate the expected rate of return and standard deviation for each investment. C. What investment would you prefer?
Is it reasonable to assume that Treasury bonds will provide higher returns in recessions than in booms? Calculate the expected rate of return and standard deviation for each investment. Which investment would you prefer?
Assuming a mild preference for shorter-term bonds, the liquidity premium theory suggests that a flat yield curve is an indication of: A) constant short-term interest rates in the near and further future. B) a slight rise in short-term interest rates in the near future and a slight decline in the further future. C) constant short-term interest rates in the near future and a slight decline in the further future. D) a slight decline in short-term interest rates in the near and further future. Support your answer using a numerical example and explain carefully all the assumptions you make.
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