土豆妮

What are the implications for the shape of the yield curve according to the liquidity theory? The yield curve:

A) must be upward sloping.

B) may have any shape.

C) is always flat.

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The liquidity theory holds that investors demand a premium to compensate them to interest rate exposure and the premium increases with maturity. Even after adding the premium to a steep downward sloping yield curve the result will still be downward sloping.

土豆妮

The liquidity premium theory of the term structure of interest rates projects that the normal shape of the yield curve will be:

A) variable.

B) upward sloping.

C) downward sloping.

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The liquidity theory holds that investors demand a premium to compensate them to interest rate exposure and the premium increases with maturity. By itself, the liquidity theory implies an upward sloping yield curve.