Suppose an investor observes an upward term structure of interest rate. Answer the following questions. (a) According to the expectation hypothesis, what will be the investor’s forecast about future change of interest rate (increase, decrease or unchanged)?  (b) What will the investor say about the future change of interest rate according to liquidity preference theory? Explain your argument.

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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Suppose an investor observes an upward term structure of interest rate. Answer the following
questions.


(a) According to the expectation hypothesis, what will be the investor’s forecast about future
change of interest rate (increase, decrease or unchanged)? 


(b) What will the investor say about the future change of interest rate according to liquidity
preference theory? Explain your argument. 

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