According to the liquidity premium theory,
A) investors prefer longer to shorter maturities.
B) investors prefer shorter to longer maturities.
C) investors are indifferent between short and long maturities.
D) investors are more interested in the tax treatment of bonds than they are in the liquidity of bonds.

Question

Quizplus · Accepted Answer

The liquidity premium theory states that investors require a higher yield on longer-term bonds to compensate for the risk of tying up their money for a longer period. This implies that investors prefer shorter maturities as they are more liquid and allow for more flexibility if their investment needs change.

According to the Liquidity Premium Theory