Question

According to the liquidity preference theory of the term structure of interest rates, an increase in the yield on long-term corporate bonds versus short-term bonds could be due to ________.

options:
A)an increase in expected interest rate volatility
B)a decline in future inflation expectations
C)declining liquidity premiums
D)an expectation of an upcoming recession

Answer 1

According to the liquidity preference theory of the term structure of interest rates, an increase in the yield on long-term corporate bonds versus short-term bonds could be due to declining liquidity premiums.

Step-by-step explanation:

According to the liquidity preference theory of the term structure of interest rates, an increase in the yield on long-term corporate bonds versus short-term bonds could be due to declining liquidity premiums. Liquidity premiums refer to the additional return that investors require for holding longer-term bonds that may be less liquid or harder to sell. When liquidity premiums decrease, the yield on long-term bonds increases relative to short-term bonds.