According to the Liquidity Premium Theory of the Term Structure

question 35

Multiple Choice

According to the liquidity premium theory of the term structure,

• A) 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 liquidity premium.
• B) buyers of bonds may prefer bonds of one maturity over another, yet interest rates on bonds of different maturities move together over time.
• C) even with a positive liquidity premium, if future short-term interest rates are expected to fall significantly, then the yield curve will be downward-sloping.
• D) all of the above.
• E) only A and B of the above.

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Definitions:

Return On Investment (ROI)

Net operating income divided by average operating assets. It also equals margin multiplied by turnover.

Depreciation

The systematic allocation of the cost of an asset over its useful life.

Investment Center

A business unit within a company that is responsible for its own revenues, expenses, and asset investments, with its performance measured by its ability to generate income relative to its assets.

Minimum Required Return

The lowest acceptable return on an investment, based on risk tolerance and financial goals.