Re: moore on term structure (Wray's post)

[Basil Moore <bmoore@xxxxxxxxxxxx>]

CHRIS
Long bonds have greater interest rate risk (i.e. capital risk). But they
have less income risk than shorts. With longs you can lock in a known income
stream over the maturity of the security.

I think the expectations theory requires perfect information. If
expectations were correct, holding period returns would be equalized across
different maturities.

If we do not assume perfect information, we must assume that at the margin
there are investors who are indifferent between holding longs and shorts,
i.e. are risk neutral to both capital and income risk.


What o you think??  Best  Basil



At 03:57 PM 10/7/97 -0700, you wrote:
>Randy and Basil:
>
>Perhaps I'm missing something but the straighforward answer for the long
>maturity premium is that long bonds have greater interest rate risk, and
>most bond investors are risk averse....right?
>
>Chris
>
>On Tue, 7 Oct 1997, Randy Wray wrote:
>
>> basil
>> why is the term structure almost always positive (LTr>STr)? do mkts
>> almost always expect fed to increase str?
>> randy wray
>>
>
>
>


Basil Moore, Department of Economics
Wesleyan University
685-2363