Which of the Following Best Explains Why the Long- Term

question 8

Multiple Choice

Which of the following best explains why the long- term interest rate will generally change by less than 1% when the short- term interest changes by 1%?

• A) The mathematical calculations are more difficult for analysts in the case of long- term bonds.
• B) Financial market participants will not expect this increase in the short- term interest rate to persist fully in the future.
• C) Long- term rates are always lower than short- term rates, so there is less room for them to change.
• D) Financial markets are often swept up by bubbles and fads.
• E) Financial markets assume that the central bank will be passive as interest rates rise or fall.