What can you deduce about forward rates of interest if the liquidity premium hypothesis of the term structure is correct?
A) The forward rate is less than investor's expectations of next years one year interest rate.
B) The forward rate is greater than investor's expectations of next years one year interest rate.
C) The forward rate is equal to investor's expectations of next years one year interest rate.
D) The forward rate is equal to the risk-free interest rate.
Correct Answer:
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