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.
Financial Reporting, Financial Statement Analysis and Valuation
8th Edition
ISBN:9781285190907
Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw
Publisher:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw
Chapter5: Risk Analysis
Section: Chapter Questions
Problem 8QE
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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
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.
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