According to the preferred habitat theory, the yield curve normally has a positive slope because
A)short-term interest rates are expected to rise.
B)term premiums rise as the time to maturity increases.
C)risk premiums rise over time.
D)long-term bonds are more liquid than short-term bonds.

Question

Quizplus · Accepted Answer

The preferred habitat theory states that investors have a preferred maturity or "habitat" for their investments and will only deviate from this preferred habitat if they are compensated with a term premium. Therefore, the yield curve is normally upward sloping because investors typically prefer short-term investments and require additional compensation in the form of higher yields for longer-term investments, which results in a positive term premium and a steeper yield curve.

According to the Preferred Habitat Theory, the Yield Curve Normally