Which of the following statements explains the liquidity premium theory of the term structure of interest rates?
A) Investors will pay higher prices for longer-term securities.
B) Investors demand a lower yield for securities that cannot be sold quickly at high prices.
C) Investors demand a higher return on longer-term securities with greater price risk and less marketability.
D) Investors will pay higher prices for securities with greater price risk and less marketability.

Question

Quizplus · Accepted Answer

The liquidity premium theory suggests that investors require a higher return on longer-term securities due to their greater price risk and lower marketability compared to short-term securities.

Which of the Following Statements Explains the Liquidity Premium Theory