The contention that liquidity premiums are inversely related to the level of market interest rates is known as the:
A) Price-risk hypothesis
B) Money-substitutes hypothesis
C) Unbiased expectation hypothesis
D) Fisher Hypothesis
E) None of the above

Question

Quizplus · Accepted Answer

The price-risk hypothesis states that liquidity premiums are inversely related to the level of market interest rates. This is because when interest rates are high, investors are more likely to hold liquid assets in order to take advantage of the higher returns. As a result, the demand for liquid assets increases, which drives up their prices and lowers their liquidity premiums.

The Contention That Liquidity Premiums Are Inversely Related to the Level