Under the Liquidity Premium Theory, if investors expect short-term interest rates to remain constant, the yield curve should:
A)have a positive slope.
B)have a negative slope.
C)be flat.
D)have an increasing slope.

Question

Quizplus · Accepted Answer

The Liquidity Premium Theory suggests that long-term interest rates are generally higher than short-term rates due to the added risk of holding longer-term securities. Even if short-term rates are expected to remain constant, the yield curve will have a positive slope because of the liquidity premium demanded by investors for holding longer-term bonds.

Under the Liquidity Premium Theory, If Investors Expect Short-Term Interest