Explain how theory explains all three empirical observation

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Reference no: EM1369109

Q. re are three empirical facts which a theory of term structure of interest rates must explain:

i. Interest rates on bonds of different maturities move together over time.

ii. When short-term interest rates are low yield curves typically have an upward slope when short-term interest rates are high yield curves tend to be downward (inverted).

iii. Yield curves typically are sloped upwards.

These three empirical observations are explained by ‘Preferred Habitat theory'. First, completely explain Preferred Habitat theory. Next, explain how this theory explains all three empirical observations.

Reference no: EM1369109

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