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If the yield curve has a mild upward slope, the liquidity premium theory (assuming a mild
preference for shorter-term bonds) indicates that the market is predicting ____.
A) a rise in short-term interest rates in the near future and a decline further out in the future
B) constant short-term interest rates in the near future and further out in the future
C) a decline in short-term interest rates in the near future and a rise further out in the future
D) a decline in short-term interest rates in the near future and an even steeper decline further out
in the future
Answer: B
Diff: 3 Type: MC Page Ref: 127
Skill: Applied
Objective List: 6.2 Explain how interest rates on bonds with different maturities are related
A particularly attractive feature of the ____ is that it tells you what the market is
predicting about future short-term interest rates by just looking at the slope of the yield curve.
A) segmented markets theory
B) expectations theory
C) liquidity premium theory
D) separable markets theory
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
The steeply upward sloping yield curve in the figure above indicates that ____.
A) short-term interest rates are expected to rise in the future
B) short-term interest rates are expected to fall moderately in the future
C) short-term interest rates are expected to fall sharply in the future
D) short-term interest rates are expected to remain unchanged in the future
Answer: A
Diff: 2 Type: MC Page Ref: 128
Skill: Applied
Objective List: 6.2 Explain how interest rates on bonds with different maturities are related