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21) Which theory of term structure predicts that long-term yields will exceed short-term yields on average?...

21) Which theory of term structure predicts that long-term yields will exceed short-term yields on average?
A) Pure expectations   B) Segmented markets   C) Liquidity premium D) None of the previous.

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Answer #1

Option

C) Liquidity premium

The long term yield is higher because the liquidity of long term is lower than the liquidity of the short run. the yield is higher because the long term is paid liquidity premium, the opportunity cost of the money is higher than the short run so the yield is higher for the long term.

it is explained by the liquidity premium theory.

pure expectations say that the short term rates provide long term future rate rates and it has a direct relationship.

The segmented market theory distributes the market in short, intermediate and long term and it specifies the characteristics of investors also it specifies that there is no relationship between one segment and the other segment so can not predict the rates in other market based on the different segment.

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