Suppose That Interest Rates Are Expected to Remain Unchanged Over

question 7

Multiple Choice

Suppose that interest rates are expected to remain unchanged over the next few years. However, there is a risk premium for longer-term bonds. According to the liquidity premium theory, the yield curve should be:

• A) upward sloping and very steep.
• B) upward sloping and relatively flat.
• C) inverted.
• D) vertical.

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