Comment on the following: “There is no theory of the term structure of interest rates that would explain a yield curve in which interest rates increase with maturity for the first two years, decline with maturity until year 5, and then increase with maturity after year 5.”
Question 18.20: Comment on the following: “There is no theory of the term st...
What is described in the quote is a humped yield curve. A humped yield curve is not consistent with the liquidity preference theory and the market segmentation theory. However, a humped yield curve may be consistent with the preferred habitat theory, in which interest rates are determined by the supply and demand for securities at the different maturities.
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