Question

Consider the liquidity preference theory of the term structure of interest rates. On average, one would expect investors to require:

a.

a higher yield on long-term bonds than on short-term bonds

b.

none of these options

c.

the same yield on both short-term and long-term bonds.

d.

a higher yield on short term bonds than on long-term bonds

Answer 1

Ans a. a higher yield on long-term bonds than on short-term bonds

Consider the liquidity preference theory of the term structure of interest rates. On average, one would expect investors to require a higher yield on long-term bonds than on short-term bonds. Liquidity preference theory is a model that suggests that an investor should demand a higher interest rate or premium or securities with long term maturities that carry greater risk.