Explanation:
The term structure of interest rates, also known as the yield curve, is a graphical representation that shows the relationship between interest rates and bond yields of various maturities ranging from short-term to long-term. The shape and level of the term structure can change over short-term horizons due to factors such as changes in economic conditions, monetary policy, and market demand for bonds. On the other hand, the level of rates over the long term is determined by long-term economic prospects and expectations about future inflation and real interest rates. Therefore, forecasts are useful in describing the shape and level of the term structure over short-term horizons and the level of rates at long-term horizons.
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Q.1639 As finance professionals, we know the definition of the term structure of interest rates as “the relationship among bond yields or interest rates and different maturities or terms.” The forecasts are useful in describing the shape and level of the term structure over _____ horizons and the level of rates at _____ horizons. This carries significant implications when selecting term structure models.
A
medium-term; short-term
B
long-term; short-term
C
long-term; medium-term
D
short-term; long-term
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