The Expectations Hypothesis States That the Forward Interest Rate Is

question 22

Multiple Choice

The expectations hypothesis states that the forward interest rate is the:
I. expected future spot rate
II. always greater than the spot rate
III. yield to maturity

• A) I only
• B) II only
• C) III only
• D) II and III only

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Definitions:

M&M Proposition I

A theory stating, under certain conditions, that the value of a firm is unaffected by how it is financed, whether through debt or equity.

Interest Tax Shield

The reduction in income taxes that results from taking a deductible charge, such as interest on debt, reducing taxable income.

Tax

Compulsory financial charge or some other type of levy imposed upon a taxpayer by a governmental organization in order to fund government spending and various public expenditures.

Capital Structure

The mix of different forms of external funds and equity used by a firm to finance its overall operations and growth.