Investor A believes in the Expectations hypothesis while Investor B believes in the Liquidity preference theory. Both investors are trying to evaluate the return from holding a given 5-year maturity bond for the next 2 years. Assuming the investors use the same reference forward rates, and the liquidity premium is positive, Investor B calculates a higher 2-year holding return for the bond than Investor A.

 Explain the reason

Answer rating: 100% (QA)

The difference in the 2year holding return calculations between Investor A who follows the Expectati... View the full answer