The idea that a normal yield curve is most frequently observed can be explained by the __________ theory/theories.
A) expectations
B) segmented
C) expectations and liquidity premium
D) segmented and liquidity premium

Question

Quizplus · Accepted Answer

The idea of a normal yield curve being the most frequently observed is explained by the expectations theory and the liquidity premium theory. The expectations theory suggests that long-term interest rates are primarily determined by expectations of future short-term interest rates. The liquidity premium theory suggests that investors demand a higher yield for longer-term bonds to compensate for the greater risk of holding them. Together, these theories help explain why normal yield curves are more commonly observed.

The Idea That a Normal Yield Curve Is Most Frequently