The liquidity premium theory of the term structure of interest rates is best supported by what type of yield curve?
A) a decreasing curve over time.
B) a flat yield curve.
C) an increasing yield curve over time.
D) a twisted yield curve
E) none of the above.

Question

Quizplus · Accepted Answer

The liquidity premium theory suggests that longer-term interest rates are higher than short-term rates due to the added risk and reduced liquidity of longer-term investments, leading to an increasing yield curve over time.

The Liquidity Premium Theory of the Term Structure of Interest