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Describe the two hypotheses that explain the shape of the yield curve. (Select ail the choices that
apply.) A. One hypothesis is the liquidate- preference hypothesis: investors wish to be
compensated for holding longer-term bonds. B. One hypothesis is the liquidity preference
hypothesis: long-term rates are the market's best guess of average expected short-term rates. c.
Another hypothesis that explains the shape of the yield curve is the unbiased expectations
hypothesis: long-term rates are the market's best guess of average expected short-term rates. D.
Another hypothesis that explains the shape of the yield curve is the unbiased expectations
hypothesis: investors wish to be compensated for holding longer-term bonds.
Solution
The two hypotheses that explain the shape of the yield curve are:
A. One hypothesis is the liquidity preference hypothesis: investors wish to be compensated for
holding long-term bonds.
B. One hypothesis is the liquidity preference hypothesis: long-term rates are the market's best
guess of average expected short-term rates.

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Describe the two hypotheses that explain the shape of the yield curve-.docx

  • 1. Describe the two hypotheses that explain the shape of the yield curve. (Select ail the choices that apply.) A. One hypothesis is the liquidate- preference hypothesis: investors wish to be compensated for holding longer-term bonds. B. One hypothesis is the liquidity preference hypothesis: long-term rates are the market's best guess of average expected short-term rates. c. Another hypothesis that explains the shape of the yield curve is the unbiased expectations hypothesis: long-term rates are the market's best guess of average expected short-term rates. D. Another hypothesis that explains the shape of the yield curve is the unbiased expectations hypothesis: investors wish to be compensated for holding longer-term bonds. Solution The two hypotheses that explain the shape of the yield curve are: A. One hypothesis is the liquidity preference hypothesis: investors wish to be compensated for holding long-term bonds. B. One hypothesis is the liquidity preference hypothesis: long-term rates are the market's best guess of average expected short-term rates.