If Liquidity Influences the Yield Curve, but Is Not Considered

question 71

Multiple Choice

If liquidity influences the yield curve, but is not considered when deriving the forward interest rate, the forward interest rate ____ the market's expectation of the future interest rate.

• A)overestimates
• B)accurately estimates
• C)underestimates
• D)is an unbiased forecast of (it has an equal chance of overestimating or underestimating)

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Definitions:

Error Term

In statistical modeling, particularly regression analysis, it represents the part of the dependent variable that the model does not explain, accounting for random factors or the difference between observed and predicted values.

Random Variable

A numerical description of the outcome of an experiment.

Mean

A measure of central location computed by summing the data values and dividing by the number of observations.

Multiple Regression Model

The mathematical equation that describes how the dependent variable y is related to the independent variables x1, x2, . . . , xp and an error term e.