Question

Match each of the following theories with its description. (Enter a value: 1-4) Theory Expectations theory Preferred habitat Segmented markets

Answer 1

Expectations Theory (2)	That the interest rate on a long-term bond will equal the average of the short-term interest rates that people expect to occur over the life of the long-term bond
Preferred habitat theory (4)	The interest rate on a long-term bond will equal an average of short-term interest rates expected to occur over the life of thelong-term bond plus a liquidity premium(also referred to as a termpremium) that responds to supply and demand conditions for that bond.
Segmented markets (1)	The interest rate for each bond with a different maturity is determined by the supply of and demand for that​ bond, with no effects from expected returns on other bonds with other maturities.

Note:-

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