If yields on one-year bonds are expected to rise and the liquidity premium is zero, the yield curve will be
A) upward sloping.
B) flat.
C) downward sloping.
D) cannot be determined.

Question

Quizplus · Accepted Answer

When yields on one-year bonds are expected to rise and there is no liquidity premium, investors will demand higher yields for longer maturities to compensate for the expected increase in interest rates. This leads to an upward sloping yield curve.

If Yields on One-Year Bonds Are Expected to Rise and the Liquidity