Dave has a capital of one million, which he plans to lend to potential borrowers. Jake, a potential borrower, wants to open a bakery. He needs a loan with a term of at least ten years.
Jake wishes to obtain a loan from Dave. He proposes a ten-year loan with an annual interest rate of 5%. Dave agrees with the loan proposal as he believes it is sufficient to cover the added risk of lending long term.
Determine which of the following theories of why interest rates differ by term best describes the scenario above.
A- Market Segmentation Theory
B- Preferred Habitat Theory
C- Expectations Theory
D- Liquidity Preference Theory
E- Yield Curve Theory