What Can You Deduce About Forward Rates of Interest If

question 36

Multiple Choice

What can you deduce about forward rates of interest if the liquidity-preference hypothesis of the term structure is correct?

• A) The forward rate is less than investor's expectations of next year's one-year interest rate.
• B) The forward rate is greater than investor's expectations of next year's one-year interest rate.
• C) The forward rate is equal to investor's expectations of next year's one-year interest rate.
• D) The forward rate is equal to the risk-free interest rate.

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Definitions:

Double-Entry Bookkeeping

Process by which accounting transactions are entered; each individual transaction always has an offsetting transaction.

Owner's Equity

The residual interest in the assets of a business after deducting its liabilities, representing the owners' share of the company's resources.

Liabilities

Financial obligations or debts that a company or individual owes, which must be settled over time.

Balance Sheet

A statement presenting a company’s financial standing, including details on assets, liabilities, and equity held by shareholders, at a particular point in time.