Which of the following theories is consistent with yield curves sloping upward most of the time?
I. market segmentation theory
II. expectations theory
III. liquidity preference theory
IV. efficient markets hypothesis
A) III only
B) II, III and IV only
C) I, II and III only
D) I, II, III and IV

Question

Quizplus · Accepted Answer

The liquidity preference theory is consistent with yield curves sloping upward most of the time because it suggests that investors prefer to hold short-term bonds when interest rates are expected to rise and long-term bonds when interest rates are expected to fall. This leads to a higher demand for short-term bonds when interest rates are expected to rise, which in turn leads to higher short-term interest rates and a upward-sloping yield curve.

Which of the Following Theories Is Consistent with Yield Curves