Under the liquidity premium theory,the expectation that future short-term rates will be constant results in a yield curve that
A) is flat.
B) slopes upward.
C) slopes downward.
D) is flat, slopes upward, or slopes downward, depending on the size of the term premium at each maturity.

Question

Quizplus · Accepted Answer

The liquidity premium theory suggests that longer-term interest rates typically include a liquidity premium to compensate investors for the increased risk of holding longer-term securities. Even if future short-term rates are expected to be constant, the yield curve slopes upward because of this liquidity premium added to the expected future short-term rates.

Under the Liquidity Premium Theory,the Expectation That Future Short-Term Rates