Question #33
Reading: Reading 25 The Term Structure and Interest Rate Dynamics
PDF File: Reading 25 The Term Structure and Interest Rate Dynamics.pdf
Page: 12
Status: Correct
Correct Answer: A
Question
Which of the following most accurately explains the "locked-in-rate" interpretation of forward rates? The forward rate allows an investor to lock in:
Answer Choices:
A. a coupon rate for some future period
B. a coupon rate for the current period
C. an interest rate for some future period
Explanation
The pure expectations theory can be explained using a "locked-in-rate" line of reasoning,
whereby forward rates are interpreted as the rate that can be "locked in" for some future
period.