According to the liquidity premium theory,the yield curve normally has a positive slope because
A) short-term interest rates are expected to rise.
B) term premiums rise as the time to maturity increases.
C) risk premiums rise over time.
D) long-term bonds are more liquid than short-term bonds.

Question

Quizplus · Accepted Answer

The liquidity premium theory suggests that as the time to maturity increases, investors demand a higher compensation for the added risk and uncertainty of holding longer-term investments. This compensation is known as the term premium and it causes the yield curve to slope upwards, with longer-term interest rates typically higher than short-term rates. Therefore, choice B is the best answer as it directly relates to the theory behind the positive slope of the yield curve.

According to the Liquidity Premium Theory,the Yield Curve Normally Has