Under the Expectations Hypothesis, Bonds of Different Maturities Are Assumed

question 62

Multiple Choice

Under the expectations hypothesis, bonds of different maturities are assumed to be perfect substitutes because:

• A) the risk premium is assumed to be negative.
• B) market forces would always have long-term interest rates equal the average of the current and expected short-term rate.
• C) expectations of future interest rates are uncertain and therefore cannot be included in the analysis.
• D) bond markets are very liquid.

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Definitions:

Interest Portion

Part of a loan payment that is attributed to interest charges on the borrowed principal amount.

Principal Amount

The original sum of money borrowed in a loan or put into an investment, excluding interest or profit.

Installment Note

A debt instrument that requires regular payments, or installments, of principal and interest over a set period of time until the full amount, including interest, is paid.

Premium on Bonds Payable

The amount by which a bond's sale price exceeds its face value, reflecting additional value due to market conditions or the bond's terms.