According to the liquidity preference theory of the term structure of interest rates, an increase in the yield on long-term corporate bonds versus short-term bonds could be due to ________.

Question

Quizplus · Accepted Answer

The liquidity preference theory suggests that investors demand a premium for the increased risks associated with holding longer-term securities, including interest rate volatility. An increase in expected interest rate volatility would lead investors to demand a higher yield on long-term bonds to compensate for this risk, thus explaining the increase in the yield on long-term corporate bonds versus short-term bonds.

According to the Liquidity Preference Theory of the Term Structure