According to the Liquidity Premium Theory of the Term Structure

question 91

Multiple Choice

According to the liquidity premium theory of the term structure,

• A) because buyers of bonds may prefer bonds of one maturity over another, interest rates on bonds of different maturities do not move together over time.
• B) the interest rate on long-term bonds will equal an average of short-term interest rates that people expect to occur over the life of the long-term bonds plus a term premium.
• C) because of the positive term premium, the yield curve cannot be downward-sloping.
• D) all of the above.
• E) only A and B of the above.

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Definitions:

Collectively Exhaustive

A condition where all possible outcomes or cases are considered together, covering every eventuality.

Probability

A measure of the likelihood of a given event occurring, often expressed as a number between 0 and 1.

Mutually Exclusive

Events or propositions that cannot both be true or occur at the same time, implying the occurrence of one event excludes the occurrence of the other.

P(A)

The probability of event A occurring.