The Liquidity Preference Hypothesis Explains That the 2^nd Year Forward

question 52

Multiple Choice

The liquidity preference hypothesis explains that the 2^nd year forward rates are set higher than the expected spot rate over year two because:

• A) of a downward sloping yield curve.
• B) of long term rates being greater than short term rates.
• C) investors must be induced to buy the riskier two-year bond.
• D) two year bonds are less risk than one year's bonds when rates are higher.

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