If the yield curve has a mild upward slope,the liquidity premium theory (assuming a mild preference for shorter-term bonds)indicates that the market is predicting
A)a rise in short-term interest rates in the near future and a decline further out in the future.
B)constant short-term interest rates in the near future and further out in the future.
C)a decline in short-term interest rates in the near future and a rise further out in the future.
D)a decline in short-term interest rates in the near future and an even steeper decline further out in the future.

Question

Quizplus · Accepted Answer

The liquidity premium theory suggests that an upward-sloping yield curve, even if mild, indicates that the market expects short-term interest rates to remain constant, as the upward slope is due to the liquidity premium for holding longer-term bonds.

If the Yield Curve Has a Mild Upward Slope,the Liquidity