CFA Practice Question

There are 147 practice questions for this study session.

CFA Practice Question

The liquidity theory explains why the yield curve is:

A. upward-sloping most of the time.
B. always upward-sloping.
C. flat or downward-sloping most of the time.
Correct Answer: A

The theory assumes that investors always charge a premium for tying up their capital for a longer period. Therefore, forward rates will embody a liquidity premium. Even if future interest rates are expected to be unchanged or fall, with a liquidity premium increasing fast enough with maturity the yield curve is most likely to be upward-sloping.

User Contributed Comments 6

User Comment
mysking what's the different between A & B? always = most of the tme
bmeisner Mysking doesn't read good.
noonah If future interest rates fall and the long-maturity premiums do not rise enough to compensate, then the curve will not be upward sloping, and hence the "most of the time"
AusPhD bmeisner, you made me laugh out loud, classic!
tabulator cruel, CRUEL bmeisner!
bodduna "most of the time" != "always"
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