ABSTRACT
In dealing with the problem of uncertainty with respect to future interest rates and its implications, we can distinguish between the Keynesian and the classical approaches. The classical theory treats assets of different maturities as embodying different-length sequences of successive short-period loans; the Keynesian theory treats assets of different maturities in the same way as the theory of value treats different commodities. In this approach, each of a wide range of securities is assumed to have a particular set of more or less desirable characteristics. The relative supplies of these various assets, in conjunction with the preferences of potential holders and their wealth, which acts as a sort of budget constraint, determines the relative prices of the assets and therefore the yields on them.
