Suppose an investor observes an upward term structure of interest rate. Answer the following questions. (a) According to the expectation hypothesis, what will be the investor’s forecast about future change of interest rate (increase, decrease or unchanged)? (b) What will the investor say about the future change of interest rate according to liquidity preference theory? Explain your argument.

Suppose an investor observes an upward term structure of interest rate. Answer the following questions. (a) According to the expectation hypothesis, what will be the investor’s forecast about future change of interest rate (increase, decrease or unchanged)? (b) What will the investor say about the future change of interest rate according to liquidity preference theory? Explain your argument.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 4QTD

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