According to the ____, long-term interest rates are a function of expected short-term interest rates.
A) maturity theory
B) expectations theory
C) market segmentation theory
D) preferred habitat theory

Question

Quizplus · Accepted Answer

The expectations theory proposes that long-term interest rates are determined by the market's expectations of future short-term interest rates, and thus, choice B is the correct answer. The maturity theory states that long-term interest rates are solely based on the term of the bond, while the market segmentation theory asserts that investors have specific preferences for different maturities, leading to segmented markets. The preferred habitat theory suggests that investors are willing to move outside their preferred maturity range only if the yields are attractive enough.

According to the ____, Long-Term Interest Rates Are a Function