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Explain three term structure theories and how inflation premiums and price movement?
Three term structure theories related to term structure are-
A. Unbiased expectation theory
B. Liquidity premium theory
C. Market segmentation theory
Unbiased expectation theory suggests that anytime the curve will be reflecting the current expectation of the market about the future short term rate.
The liquidity premium theory use the unbiased theory but it will be saying that investor who are holding long term maturity only if the securities with long-term maturities are offering a premium to compensate for future uncertainty in the value of the security because they are lesser liquid and they are having a higher maturity
Market segmentation theory advocates that it does not include the unbiased theory or the liquid theory and it will be focusing that individual investors and other investors have a specific maturity preferences and it will be convincing them to buy various specific securities and they will be unaffected by each other.