The Liquidity Premium Theory of the Term Structure of Interest

question 43

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)recognises that forward rates are perfect predictors of future interest rates.
• D)assumes that risk premiums increase uniformly with maturity.

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Definitions:

Market Value

The current market valuation at which services or assets are purchasable or sellable.

Book Value

The net value of a company's assets minus its liabilities, often used to assess if a company's stock is under- or overvalued.

Note Payable

An obligation in writing that promises to pay a specified sum of money at a determined future date or on demand.

Capital Balances

The amount of money that owners have invested in a company plus any retained earnings or losses.