Traditional Theories of the Term Structure of Interest Rates
Which of the following theories of term structure of interest rates suggests that investors are most likely indifferent between holding bonds of varying maturities?
Right!
Pure expectations theory suggests that a forward rate is an unbiased predictor of the future spot rate, leading to perfect substitutability of all bonds and risk neutrality on the part of investors.
Not exactly.
Segmented markets theory suggests that investors only wish to hold bonds of a certain maturity, allowing for _no_ substitutability between bonds of varying maturities.
No.
Liquidity preference theory suggests liquidity premia, generally making investors prefer shorter-term bonds.
Pure expectations theory
Segmented markets theory
Liquidity preference theory
