If We Assume an Initially Flat Term Structure Followed by Economic

question 44

Multiple Choice

If we assume an initially flat term structure followed by economic news that subsequently leads market participants to expect interest rates to rise, which of the below statements is FALSE if the pure expectations theory holds?

• A) Market participants interested in a long-term investment would not want to buy long-term bonds because they would expect the yield structure to rise sooner or later, resulting in a price decline for the bonds and a capital loss on the long-term bonds purchased.
• B) Any response from borrower or lender would tend either to lower the net demand for, or to increase the supply of, long-maturity bonds, and two responses would increase demand for long-term debt obligations.
• C) Speculators expecting rising rates would anticipate a decline in the price of long-term bonds and, therefore, would want to sell any long-term bonds they own and possibly to "short sell" some they do not now own.
• D) Borrowers wishing to acquire long-term funds would be pulled toward borrowing now, in the long end of the market, by the expectation that borrowing at a later time would be more expensive.

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Definitions:

Ego Integrity

A sense of coherence and wholeness resulting from reflective satisfaction with one's life achievements, as discussed in Erikson's theories of psychosocial development.

Life Satisfaction

An assessment of one's overall contentment or happiness with life, encompassing various dimensions such as personal achievements, relationships, and emotional well-being.

Ego Transcendence

A concept in psychological development where individuals come to understand their life as part of a larger context, moving beyond personal ambitions and concerns.

Depression

A mental health disorder characterized by persistently depressed mood or loss of interest in activities, causing significant impairment in daily life.