Question

According to the liquidity premium theory of interest rates,

a. investors prefer certain maturities and will not normally switch out of those maturities.
b. investors are indifferent between different maturities if the long-term spot rates are equal to the average of current and expected future short-term rates.
c. long-term spot rates are higher than the average of current and expected future short-term rates.
d. the term structure must always be upward sloping. long-term spot rates are totally unrelated to expectations of future short-term rates.

Answer 1

C. long-term spot rates are higher than the average of current and expected future short-term rates

Step-by-step explanation: