According to the liquidity premium theory, the expected yield on a two-year security will ____ the expected yield from consecutive investments in one-year securities.
A)equal
B)be less than
C)be greater than
D)be less than or greater than, depending on the size of the liquidity premium

Question

Quizplus · Accepted Answer

The liquidity premium theory suggests that longer-term securities will have higher yields than shorter-term securities due to the added risk and lower liquidity associated with longer maturities. Therefore, the expected yield on a two-year security will be greater than the expected yield from consecutive investments in one-year securities, to compensate for the additional risk and lower liquidity.

According to the Liquidity Premium Theory, the Expected Yield on a Two-Year