Question #24
Reading: Reading 25 The Term Structure and Interest Rate Dynamics
PDF File: Reading 25 The Term Structure and Interest Rate Dynamics.pdf
Page: 9
Status: Correct
Correct Answer: B
Question
Don McGuire, fixed income specialist at MCB bank makes the following statement: "In the very short-term, the expected rate of return from investing in any bond, including risky bonds, is the risk-free rate of return". McGuire's statement is most consistent with:
Answer Choices:
A. unbiased expectations theory
B. local expectations theory
C. liquidity preference theory
Explanation
Local expectations theory asserts that in the very short term, the expected return for
every bond is the risk-free rate but does not extend the risk-neutrality assumption to
every maturity strategy like the unbiased expectations theory.