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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Definitions:

Standard Deviation

A statistical measure of the dispersion or variability in a set of values, indicating how much the values deviate from the mean of the set.

Standard Deviation

A measure of the dispersion or spread in a set of data; it shows how much variation there is from the average.

Government Agency

An organization at the national, state, or local level that administers specific functions or services to the public.

Central Tendency

A statistical measure that identifies the center or typical value of a dataset, including mean, median, and mode.