Based on the modern term structure theory, interest rates will increase with decrease in
A) Inflation rates
B) Default risk
C) Liquidity
D) Real interest rates
E) Interest rate volatility

Question

Quizplus · Accepted Answer

A decrease in liquidity typically leads to an increase in interest rates as lenders demand a higher return for the increased risk associated with less liquid assets.

Based on the Modern Term Structure Theory, Interest Rates Will