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Up1
How are upward-sloping yield
curves explained by the Pure Expectations Theory?- There are separate markets for long-term and short-term securities, and the
long-term market demands greater returns. - Future interest rates are expected to rise.
- Investors in long-term securities demand a risk premium for tying their
money up longer.
- There are separate markets for long-term and short-term securities, and the
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Up5
The three major term
structure theories are summarized below from the perspective of an
upward-sloping yield curve:Pure Expectations Theory – Future
interest rates are expected to rise.Liquidity Preference Theory – Investors in long-term
securities demand a risk premium for tying their money up longer.Market Segmentation Theory – There are separate markets
for long-term and short-term securities, and the long-term market demands
greater returns.
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