- Which ofthe following statements about theories ofthe yield curve is most likely correct? A. A liquidity preference cannot be consistent with a flat term structure of interest rates. B. The pure expectations theory cannot explain a humped term structure of interest rates. C. The pure expectations theory suggests that an upward-sloping term structure of interest rates is a consequence of investors expecting shorttermrates to remain unchanged for a period of time, followed by investors expecting short-term rates to rise for a period of time. D. The liquidity preference theory suggests that a downward-sloping term structure of interest rates is due to investors expecting short-term rates to decline, and although there is a maturity premium to consider, it is not large enough to offset the expectation of declining short-term rates. I got A, but D is official. isn’t D expectation theory?
D is correct, because a liquidity premium might not compensate the worst case scenario
no. i’ts liquidity theory. A is wrong because if you expect short term rates to decline, the liquidity preference part can make it consistent with a flat term structure of interest rates
understand now. thanks.