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According to the liquidity premium theory of the term structure ____.
A) bonds of different maturities are not substitutes
B) if yield curves are downward sloping, then short-term interest rates are expected to fall by so
much that, even when the positive term premium is added, long-term rates fall below short-term
rates
C) yield curves should never slope downward
D) interest rates on bonds of different maturities do not move together over time
Answer: B
Diff: 3 Type: MC Page Ref: 127
Skill: Recall
Objective List: 6.2 Explain how interest rates on bonds with different maturities are related
According to the liquidity premium theory of the term structure, a steeply upward sloping
yield curve indicates that short-term interest rates are expected to ____.
A) rise in the future
B) remain unchanged in the future
C) decline moderately in the future
D) decline sharply in the future
Answer: A
Diff: 2 Type: MC Page Ref: 127
Skill: Recall
Objective List: 6.2 Explain how interest rates on bonds with different maturities are related
According to the liquidity premium theory of the term structure, a slightly upward sloping
yield curve indicates that short-term interest rates are expected to ____.
A) rise in the future
B) remain unchanged in the future
C) decline moderately in the future
D) decline sharply in the future
Answer: B
Diff: 2 Type: MC Page Ref: 127
Skill: Recall
Objective List: 6.2 Explain how interest rates on bonds with different maturities are related
According to the liquidity premium theory of the term structure, a flat yield curve indicates
that short-term interest rates are expected to ____.
A) rise in the future
B) remain unchanged in the future
C) decline moderately in the future
D) decline sharply in the future
Answer: C
Diff: 2 Type: MC Page Ref: 127
Skill: Recall
Objective List: 6.2 Explain how interest rates on bonds with different maturities are related