The Liquidity Premium Theory of the Term Structure

question 32

Multiple Choice

The liquidity premium theory of the term structure

• A) assumes investors tend to prefer short-term bonds because they have less interest-rate risk.
• B) assumes that interest rates on the long-term bond respond to demand and supply conditions for that bond.
• C) assumes that an average of expected short-term rates is an important component of interest rates on long-term bonds.
• D) assumes all of the above.
• E) assumes none of the above.

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