The Liquidity Premium Theory of the Term Structure of Interest

question 90

Multiple Choice

The liquidity premium theory of the term structure of interest rates

• A)assumes that investors will hold long-term maturity assets if there is a sufficient premium to compensate for the uncertainty of the long-term.
• B)assumes that long-term interest rates are an arithmetic average of short-term rates plus a liquidity premium.
• C)recognizes that forward rates are perfect predictors of future interest rates.
• D)assumes that risk premiums increase uniformly with maturity.
• E)None of these.

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Definitions:

Isotopes

Variants of a particular chemical element which differ in neutron number, and consequently in nucleon number, but not in proton number.

Hydrogen

The lightest and most abundant element in the universe, consisting of one proton and typically one electron.

Nucleus

The dense central core of an atom, containing protons and neutrons, or the central part of a cell, containing the genetic material.

Hydrogen Atom

The simplest atom consisting of a single proton in the nucleus and a single electron bound to the nucleus.