10 lines
930 B
Markdown
10 lines
930 B
Markdown
- **Expectations Theory (A)** — Long-term rates reflect the market's _expectation_ of future short-term rates. An upward sloping curve means the market expects rates to rise. Nothing to do with preference for liquidity.
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- **Liquidity Preference Theory (C)** — Investors _prefer_ short-term bonds because they're more liquid and less price-volatile. They'll only go long-term if paid a premium for the extra risk. This is the one your answer described.
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- **Market Segmentation Theory (B)** — Different institutional players dominate different parts of the yield curve (banks = short-term, insurance companies = long-term). Supply and demand in each segment determines yields. This is the only theory that can explain _all_ yield curve shapes including inverted and humped.
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A memory trick:
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- **Expectations** = future rates
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- **Liquidity** = pay me more to go long
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- **Segmentation** = different players, different segments
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