In some time periods, there is evidence that corporations initially financed long-term projects with short-term funds. They planned to borrow long-term funds once interest rates were lower. This specifically supports the ____ for explaining the term structure of interest rates.
A)liquidity premium theory
B)expectations theory
C)segmented markets theory
D)liquidity premium theory AND segmented markets theory

Question

Quizplus · Accepted Answer

The expectations theory suggests that the shape of the yield curve reflects investors' expectations for future interest rates. If corporations finance long-term projects with short-term funds hoping to refinance at lower rates later, it implies they are acting on expectations that interest rates will fall, which aligns with the expectations theory.

In Some Time Periods, There Is Evidence That Corporations Initially