- CFA Exams
- CFA Level I Exam
- Study Session 12. Fixed Income (1)
- Reading 32. The Term Structure and Interest Rate Dynamics
- Subject 5. Traditional Theories of the Term Structure of Interest Rates
CFA Practice Question
"Whether you buy a 1 year bond, or a 10 year bond and sell it in a year, you'll get the same return." Which term structure theory would support such a statement?
A. Local expectations theory
B. Liquidity preference theory
C. Un-preferred habitat theory
Explanation: It is a form of the pure expectations theory that suggests that the returns on bonds of different maturities will be the same over a short-term investment horizon.
User Contributed Comments 1
| User | Comment |
|---|---|
| charliedba | Local expectations interpretation: this one takes into account that price risk exists, but recognizes that if everything goes the way things are planned (with respect to forward rates) then it shouldn't matter what maturity you sign up for in your investment purchase, you will realize the same yield. |