The Preferred Habit Theory of Term Structure of Interest Rates

question 34

Multiple Choice

The preferred habit theory of term structure of interest rates suggests that long-term bonds should________ short-term bonds due to investor risk aversion.

• A) Hold a premium over
• B) Have a discount over
• C) Offer the same return as
• D) Be entirely separate of

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Definitions:

Total Utility

The utmost satisfaction achieved from utilizing a specified amount of goods or services.

Limited Income

Describes a situation where an individual or household has a finite or restricted amount of monetary resources available for spending and saving.

Marginal Utilities

The gain in utility or enjoyment a consumer realizes from the consumption of one extra unit of a good or service.

Extra Total Utility

The additional satisfaction or benefit that a consumer derives from consuming one more unit of a good or service.