Consider the Liquidity Preference Theory of the Term Structure of Interest

question 39

Multiple Choice

Consider the liquidity preference theory of the term structure of interest rates.On average,one would expect investors to require _________.

• A) a higher yield on short term bonds than long term bonds
• B) a higher yield on long term bonds than short term bonds
• C) the same yield on both short term bonds and long term bonds
• D) the liquidity preference theory cannot be used to make any of the other statements.

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Definitions:

Stock Market

A public market for buying, selling, and trading company shares and securities.

Long-term Real Rate

The interest rate on a long-term loan or investment, adjusted for the effects of inflation, reflecting the real cost of borrowing or the real yield on an investment.

Bonds

Fixed-income securities where an investor loans money to an entity (corporate or sovereign) which borrows the funds for a defined period of time at a variable or fixed interest rate.

Average Rate Of Return

A measure of the profitability of an investment, calculated by dividing the average annual profit by the initial investment cost.