Which theory does this pertain to?
“yields are a reflection of expected spot rates and risk premiums. Investors demand risk premium for holding long-term bonds, and these risk premiums increase with maturity.”
Answer is liquidity preference…how is it not local expectations theory? it talks longer maturity having risk premium and nothing about “liquidity”?
liquidity preference – investors demand a risk premium for holding longer maturities. If you make me hold 5 year bonds, I may charge you 5%, but if you make me hold that same bond for 30 years, i want 50%!!!
Local expectation theory is more centered around short term interest rates… the statement you referred talks about long term.
They aint gonna spell out the word “liquidity” for ya in the test… that would be… too easy.