The Liquidity Premium Theory of the Term Structure of Interest

question 28

Multiple Choice

The liquidity premium theory of the term structure of interest rates:

• A)denies the importance of expectations.
• B)only supports ascending yield curves.
• C)assumes that for a given yield investors prefer several successive short term investments rather than one long term one.
• D)assumes that investors only accept to invest in their preferred maturity.

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Definitions:

Production Costs

The total expenses incurred in the process of producing goods or services, including raw materials, labor, and overhead.

Decision Making

The cognitive process of selecting a course of action from among multiple alternatives, often involving considerations of risk and benefits.

Accounting Profits

The net income a company reports on its financial statements, calculated as total revenues minus explicit costs and depreciation.

Economic Profits

The difference between total revenue and total costs, including both explicit and implicit costs, indicating a gain beyond the normal profit levels expected in a competitive market.