The Liquidity Premium Theory of the Term Structure Assumes

question 18

Multiple Choice

The liquidity premium theory of the term structure assumes:

• A) that interest rates on long-term bonds respond to supply and demand conditions for those bonds.
• B) investors have a preference for short-term bonds, as they have lower interest-rate risk.
• C) that an average of expected short-term rates is an important component of interest rates on long-term bonds.
• D) all of the given answers are correct.

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