- CFA Exams
- CFA Level I Exam
- Topic 6. Fixed Income
- Learning Module 28. The Term Structure and Interest Rate Dynamics
- Subject 4. Traditional Theories of the Term Structure of Interest Rates
CFA Practice Question
Which interest rate theory states that any long-term rate is the average of the expectations of the future short-term rates?
A. Liquidity preference
B. Expectations hypothesis
C. Market segmentation
Explanation: It suggests that the term structure of interest rates is based on investor expectations about future rates of inflation.
User Contributed Comments 1
| User | Comment |
|---|---|
| yanoshi | The liquidity preference theory says that future rates are higher because investors need compensation for the risk of a longer holding horizon. It has nothing to do with expectations of short term rates. |