According to the liquidity theory of the term structure, the forward rate should reflect both interest rate expectations and:
A) A liquidity premium.
B) A risk premium.
C) A maturity premium.
D) A marketability premium.
E) None of the above.

Question

Quizplus · Accepted Answer

The liquidity theory of the term structure suggests that the forward rate reflects interest rate expectations plus a liquidity premium. This premium compensates investors for the increased risk associated with longer-term investments, which are generally considered less liquid than shorter-term investments.

According to the Liquidity Theory of the Term Structure, the Forward