The liquidity premium theory of term structure of interest rates suggests that long-term bonds should________ short-term bonds due to investor risk aversion.

Question

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According to the liquidity premium theory, investors typically demand a higher return or premium for investing in longer-term bonds compared to short-term ones due to the perceived higher risk associated with tying up their money for a longer time. Therefore, long-term bonds should hold a premium over short-term bonds.

The Liquidity Premium Theory of Term Structure of Interest Rates