For the liquidity theory, the shape of the yield curve is determined by supply of and demand for securities within each maturity sector.

Question

Quizplus · Accepted Answer

The liquidity preference theory suggests that the shape of the yield curve is determined by investors' preference for shorter-term securities, which are considered more liquid and less risky, leading to higher demand and lower yields for short-term securities compared to long-term securities.

For the Liquidity Theory, the Shape of the Yield Curve