The liquidity premium theory of the term structure proposes:
A) it is the relative supply and demand of securities in the various maturity ranges that determines yields.
B) investors have a preference for short-term bonds, as they have greater liquidity.
C) longer-term bonds have less default risk.
D) longer-term bonds are less volatile in price.

Question

Quizplus · Accepted Answer

The liquidity premium theory suggests that investors prefer short-term bonds due to their greater liquidity and less exposure to interest rate risk, thus requiring a premium (higher yield) for holding longer-term bonds.

The Liquidity Premium Theory of the Term Structure Proposes