Preferred habitat theory

Question 1

preferred habitat theory lies between

Answer 1

LPT and SMH

Question 2

PHT recognises

Answer 2

limitations on supply for bonds with specific maturities as well as the existence of arbitrage opportunities In the market.

Question 3

arbitrage

Answer 3

used whenever any stock, commodity, or currency may be purchased in one market at a given price and simultaneously sold in another market at a higher price.

Question 4

PHT argues…

Answer 4

that the interest rate is minimised if bond maturity matches the investors planned expenditure

Question 5

investors preferred habits are…

Answer 5

not absolute

Question 6

investors are prepared to…

Answer 6

invest in bonds with other maturities if they are adequately compensated for any additional risk exposure.

Question 7

the term structure reflects…

Answer 7

the expectation of the future path of interest rates as well as a risk premium, but the risk premium does not necessarily rise uniformly with maturity.

Question 8

the shape of the yield curve is determined by

Answer 8

1. expectations on future interest rates
2. a risk premium (positive or negative) to induce market participants to shift out of their preferred habitat.

Question 9

according to this theory,

Answer 9

yield curves sloping up, down, being flat or humped are all possible and can be justified.