Madison's views on the term structure of interest rates are most consistent with the:
A) local expectations theory.
B) segmented markets theory.
C) liquidity preference theory.

Question

Quizplus · Accepted Answer

Madison's views on the term structure of interest rates are consistent with the liquidity preference theory, which argues that investors have a preference for (or demand) more liquid shorter-term bonds, which drives up their prices and decreases their yields, resulting in a yield curve that slopes upward. This is in contrast to local expectations theory, which assumes that the yield curve reflects investors' expectations of future short-term rates, and segmented markets theory, which assumes that different maturities of bonds are traded separately in distinct market segments.

Madison's Views on the Term Structure of Interest Rates Are