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The Liquidity Preference Hypothesis Explains That the 2nd Year Forward

Question 68

Multiple Choice

The liquidity preference hypothesis explains that the 2nd year forward rates are set higher than the expected spot rate over year two because:


A) of a downward sloping yield curve.
B) of long term rates being greater than short term rates.
C) investors must be induced to buy the riskier two-year bond.
D) two year bonds are less risk than one year's bonds when rates are higher.

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