The liquidity premium theory of the term structure of interest rates:
A)denies the importance of expectations.
B)only supports ascending yield curves.
C)assumes that for a given yield investors prefer several successive short term investments rather than one long term one.
D)assumes that investors only accept to invest in their preferred maturity.

Question

Quizplus · Accepted Answer

The liquidity premium theory suggests that investors prefer more liquid, short-term investments and require a premium for holding longer-term securities. Thus, they may prefer several short-term investments over a single long-term one.

The Liquidity Premium Theory of the Term Structure of Interest