Since yield curves are usually upward sloping,the ________ indicates that,on average,people tend to prefer holding short-term bonds to long-term bonds.
A) market segmentation theory
B) expectations theory
C) liquidity premium theory
D) both A and B of the above
E) both A and C of the above

Question

Quizplus · Accepted Answer

The liquidity premium theory suggests that long-term interest rates not only reflect investors' assumptions about future interest rates but also include a premium for holding longer-term bonds, due to their greater risk. This theory, along with the market segmentation theory—which posits that different investors have specific preferences for bonds of different maturities—explains why yield curves are typically upward sloping, as they account for the general preference for shorter-term bonds due to their lower risk and greater liquidity.

Since Yield Curves Are Usually Upward Sloping,the ________ Indicates That,on