According to the liquidity preference hypothesis, yield curves generally slope upward because
A) investors prefer short maturity obligations to long maturity obligations.
B) investors prefer long maturity obligations to short maturity obligations.
C) investors prefer less volatile long maturity obligations.
D) investors prefer more volatile short maturity obligations.
E) None of these are correct.

Question

Quizplus · Accepted Answer

The liquidity preference hypothesis states that investors require a higher rate of return for investing in longer maturity bonds due to the greater uncertainty and risk associated with holding longer-term investments. This preference for more liquid, shorter-term investments results in a higher demand for shorter-term bonds, which drives down their yields and creates an upward slope in the yield curve. Therefore, investors prefer short maturity obligations to long maturity obligations, and the yield curve generally slopes upward to compensate for this preference.

According to the Liquidity Preference Hypothesis, Yield Curves Generally Slope