According to the liquidity preference hypothesis yield curves generally slope upward because
A) investors prefer short maturity obligations to long maturity obligations.
B) investors prefer long maturity obligations to short maturity obligations.
C) investors prefer less volatile long maturity obligations.
D) investors prefer more volatile short maturity obligations.
E) None of the above.

Question

Quizplus · Accepted Answer

According to the liquidity preference hypothesis, investors generally prefer short-term securities to long-term securities because they require less commitment of funds, are less risky, and provide more flexibility. As a result, the demand for short-term securities is higher than for long-term securities, which leads to a lower price and, therefore, a higher yield for the long-term securities. This creates an upward sloping yield curve.

According to the Liquidity Preference Hypothesis Yield Curves Generally Slope