The shape of the yield curve can be explained by:
A) The expectations theory.
B) The liquidity theory.
C) The preferred habitat theory.
D) The market segmentation theory.
E) All of the above.

Question

Quizplus · Accepted Answer

The shape of the yield curve can be explained by various theories, including the expectations theory (which suggests that long-term rates reflect expected future short-term rates), the liquidity theory (which posits that longer maturities carry a liquidity premium), the preferred habitat theory (which suggests investors have preferred maturity segments but will shift for better returns), and the market segmentation theory (which argues that the market for different maturities is completely segmented). All these theories together provide a comprehensive explanation for the various shapes the yield curve can take.

The Shape of the Yield Curve Can Be Explained By