Question

4 Liquidity premimum theory,

Use the liquidity premium theory to explain how the quantitative easing policy implemented from 2009-2014 and the forward guidance policy at that time affect the long term interest rate.

Answer 1

The liquidity premium theory of interest rates is a key concept in bond investing. It follows the idea of investing: the greater the risk, the greater the reward. The theory seek to explain the shape of the yield curve -- the interest rates that investors receive for buying bonds of different maturities.

The Yield Curve

The yield curve, also known as the term structure of interest rates. It plots the yields, or investment returns, of a specific category of bonds on the y-axis against time on the x-axis. The most popular version of the yield curve tracks U.S. Treasury debt from three-month Treasury bills through 30-year Treasury bonds. Yield curves can be constructed for all bond types, such as municipal bonds or corporate bonds with different credit ratings, such as AAA-rated corporate bonds.

So liqiufity premium theory explains through yield curve the quantitative easdig policy implemenmted from 2009-2014 and thw forward guidance policy at that time affecyt the long term interest rate