Which of the following statements is true? (A) The expectations hypothesis indicates a flat yield curve if anticipated future short-term rates exceed current short-term rates. (B) The basic conclusion of the expectations hypothesis is that the long-term rate is equal to the anticipated short-term rate. (C) The liquidity hypothesis indicates that, all other things being equal, longer maturities will have higher yields. (D) The liquidity preference theory states that a rising yield curve necessarily implies that the market anticipates increases in interest rates.

Question

Hamza Perez

Business

27 December, 15:38

Which of the following statements is true? (A) The expectations hypothesis indicates a flat yield curve if anticipated future short-term rates exceed current short-term rates. (B) The basic conclusion of the expectations hypothesis is that the long-term rate is equal to the anticipated short-term rate. (C) The liquidity hypothesis indicates that, all other things being equal, longer maturities will have higher yields. (D) The liquidity preference theory states that a rising yield curve necessarily implies that the market anticipates increases in interest rates.

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Jonathon Rich · Answer 1

(C) The liquidity hypothesis indicates that, all other things being equal, longer maturities will have higher yields.

Explanation:

As per the expectation theory the inflation is also considered while computing the related return. Accordingly in the long run when costs increases due to inflation, the expected return is also meant to increase as every individual investor not only aims to get return but to get a return which provides gain, and surety of covering all the costs.

Accordingly in long term maturities the yields will be higher.