The upward slope of the yield curve is caused by investors' recognition of the relative difficulty of converting long-term securities to cash.This is the

Question

Quizplus · Accepted Answer

The upward slope of the yield curve is explained by the liquidity preference theory which suggests that investors demand a higher yield on long-term securities to compensate for the relative difficulty of converting them to cash, compared to short-term securities. Therefore, choice B is the best option. The expectations hypothesis suggests that long-term rates reflect the expected average of future short-term rates, while the market segmentation theory suggests that different investors and borrowers have specific preferences for specific maturities, which creates segmented markets. However, neither of these theories explains the slope of the yield curve as directly and comprehensively as the liquidity preference theory.

The Upward Slope of the Yield Curve Is Caused by Investors