Question

In​ 2016, when the interest rate on​ 10-year German government bonds became​ negative, an article in...

In​ 2016, when the interest rate on​ 10-year German government bonds became​ negative, an article in the Wall Street Journal noted that the interest rate on​ 10-year bonds depended in part on​ investors' expectations of future​ short-term interest rates. The article also noted that

open double quote“investors

​don't seem to have changed their perception of ...​ [short-term] interest rates in the future

....close double quote”

​Source: Jon​ Sindreu,

open double quote“Are

German Bonds Riding a

​Bubble?close double quote”

Wall Street

Journal​,

June​ 14, 2016.

Which of the following theories best explains the scenario​ described?

A.

The Inverted Outlook Theory.

B.

The Liquidity Premium Theory.

C.

The Segmented Markets Theory.

D.

The Expectations Theory.

0 0
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Answer #1

The expectations theory best explains the above-described scenario.

The Expectation theory attempts to predict what short-term interest rates will be in the future based on current long-term interest rates. The theory suggests that an investor earns the same amount of interest by investing in two consecutive one-year bond investments versus investing in one two-year bond today.

Here also, the interest rate on​ 10-year bonds depended in part on​ investor's expectations of future​ short-term interest rates.

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