Assume that a yield curve is influenced by interest rate expectations and a liquidity premium. Assume the yield curve is initially flat. If liquidity suddenly was no longer important, the yield curve would now have a ____ (assuming no other changes).
A)slight downward slope
B)slight upward slope
C)steep upward slope
D)steep downward slope

Question

Quizplus · Accepted Answer

If liquidity is no longer important, the liquidity premium would be removed, leading to a slight downward slope as the yield curve would reflect only interest rate expectations, which typically predict lower rates in the future.

Assume That a Yield Curve Is Influenced by Interest Rate