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According to the liquidity premium theory of the term structure, a downward 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: D
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, a yield curve that is flat means that ____.
A) bond purchasers expect interest rates to rise in the future
B) bond purchasers expect interest rates to stay the same
C) bond purchasers expect interest rates to fall in the future
D) the yield curve has nothing to do with expectations of bond purchasers
Answer: C
Diff: 2 Type: MC Page Ref: 127
Skill: Applied
Objective List: 6.2 Explain how interest rates on bonds with different maturities are related
If the yield curve is flat for short maturities and then slopes downward for longer maturities,
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 a decline 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: D
Diff: 3 Type: MC Page Ref: 127
Skill: Applied
Objective List: 6.2 Explain how interest rates on bonds with different maturities are related
If the yield curve slope is flat for short maturities and then slopes steeply upward for longer
maturities, 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) constant short-term interest rates in the near future and a decline further out in the future
Answer: C
Diff: 3 Type: MC Page Ref: 127
Skill: Applied
Objective List: 6.2 Explain how interest rates on bonds with different maturities are related