The Liquidity Preference Hypothesis Explains That the 2^nd Year Forward

question 52

Multiple Choice

The liquidity preference hypothesis explains that the 2^nd year forward rates are set higher than the expected spot rate over year two because:

• A) of a downward sloping yield curve.
• B) of long term rates being greater than short term rates.
• C) investors must be induced to buy the riskier two-year bond.
• D) two year bonds are less risk than one year's bonds when rates are higher.

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Definitions:

Rules Of Debit

Rules governing the increase or decrease in account balances within the double-entry bookkeeping system, where debits typically increase assets or expenses and decrease liabilities, equity, and revenue.

Credit Side

The right side of an accounting entry, indicating increases in liabilities, revenues, and equity, and decreases in assets and expenses.

Normal Balance

The side (debit or credit) on which increases to an account are recorded, depending on the type of account.

Liability Account

An accounting record that represents a company's legal debts or obligations that arise during the course of business operations.