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 ________.

Answer 1

An increase in expected interest rate volatility.

Step-by-step explanation:

Liquidity preference theory deals with securities of an investor with his money dealings and return of his investment. This is been proposed by Keynes before being developed by other economist experts.

Yield in long term corporate bonds versus short term bonds is certainly due to an increase in expected interest rate volatility.

Keynes stated that the rate of interest is been determined by the speculative demand for money and the supply of money available for satisfying speculative demand. After all dealings it is denoted that Keynes theory certainly is indeterminate.

Answer 2

an increase in expected interest rate volatility.

Step-by-step explanation:

Liquidity preference theory is a macroeconomic model developed by the world renowned economist, John Maynard Keynes. It is a theoretical framework that states that investors generally would want a higher interest rate on any securities or stocks with long-term maturity rate and having greater or more associated risk because, ceteris paribus investors prefer a highly liquid assets or cash.

This simply means that, ceteris paribus (all other things being equal), investors would always choose a more liquid asset, at a similar rate of return with other assets.

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 an increase in expected interest rate volatility because an investor would generally expect to recoup a higher return on investment on the long-term corporate bond.