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.

---

Definitions:

Conscious Awareness

The state of being mentally aware of one's surroundings, thoughts, and feelings; the ability to experience and reflect upon oneself and the environment.

Unconscious Thoughts

Mental processes that occur without conscious awareness, influencing feelings, actions, and decisions in ways that are not fully apparent to the individual.

Psychoanalytic Techniques

Methods used in psychoanalysis to explore the unconscious mind and resolve deep-seated psychological conflicts.

Self-Esteem

Self-esteem refers to the perception and evaluation of one's own worth, including feelings of confidence and respect for oneself.