- 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 one of the following statements about the term structure of interest rates is true?
A. The expectations hypothesis indicates a flat yield curve if anticipated future short-term rates exceed current short-term rates.
B. The liquidity premium theory indicates that, all else being equal, longer maturities will have lower yields.
C. The market segmentation theory contends that borrowers and lenders prefer particular segments of the yield curve.
Explanation: Bond market participants are limited to purchase of maturities that match the timing of their liabilities.
User Contributed Comments 4
| User | Comment |
|---|---|
| bobert | the long-term rate is equal to the average of the short term rates. Not just the anticipated rate itself. |
| wink26 | Actually, none are correct. The market segmentation theory asserts lenders/borrowers operate solely in different maturity sectors. Saying they "prefer" one to the other implies they would move, depending on yields. |
| Adkins08 | No wink26. Prefer is correct. Market segmentation based on concept that lenders will move to different segments of the yield curve if they are compensating by a better risk / return profile. |
| Drzewes | Adkins08, it's preferred habitat theory you're describing. |