According to the liquidity premium theory, the expected yield on a two-year security will ____ the expected yield from consecutive investments in one-year securities.
A) equal
B) be less than
C) be greater than
D) B and C are possible, depending on the size of the liquidity premium

Question

Quizplus · Accepted Answer

The liquidity premium theory suggests that longer-term securities will have a higher yield than the expected yield from consecutive short-term investments due to the added liquidity risk of holding longer-term securities.

According to the Liquidity Premium Theory, the Expected Yield on a Two-Year