Under liquidity preference theory, which of the following is always true? choose one)
A) The forward rate is higher than the spot rate when both have the same maturity.
B) Forward rates are unbiased predictors of expected future spot rates.
C) The spot rate for a certain maturity is higher than the par yield for that maturity.
D) Forward rates are higher than expected future spot rates.

Question

Quizplus · Accepted Answer

Liquidity preference theory suggests that investors demand a higher interest rate or premium on long-term loans compared to short-term loans, due to the greater risk and lower liquidity associated with longer maturities. This implies that forward rates, which are essentially the future rates agreed upon today for loans or investments starting at some point in the future, will be higher than the market's current expectation of future spot rates, to compensate for the increased risk and reduced liquidity over time.

Under Liquidity Preference Theory, Which of the Following Is Always