Question #44
Reading: Reading 25 The Term Structure and Interest Rate Dynamics
PDF File: Reading 25 The Term Structure and Interest Rate Dynamics.pdf
Page: 17
Status: Correct
Correct Answer: A
Question
The active bond portfolio management strategy of rolling down the yield curve is most consistent with:
Answer Choices:
A. liquidity preference theory
B. segmented markets theory
C. pure expectations theory
Explanation
Under the liquidity preference theory, investors would earn an extra return for investing in
longer-maturity bonds rather than in shorter-maturity bonds. Such extra positive risk-
premium linked to maturity of the bonds is absent in the pure expectations and the
market segmentation theory.