- CFA Exams
- CFA Level I Exam
- Topic 6. Fixed Income
- Learning Module 28. The Term Structure and Interest Rate Dynamics
- Subject 4. Traditional Theories of the Term Structure of Interest Rates
CFA Practice Question
According to the liquidity - preference theory the forward rate is:
A. Less than the expected future spot rate.
B. Greater than the expected future spot rate.
C. Equal to the expected future spot rate.
Explanation: This is due to the liquidity premium.
User Contributed Comments 9
| User | Comment |
|---|---|
| toly | why B? |
| katybo | I think it must compensate for liquidity risk |
| myanmar | katybo - u're right |
| noonah | There is a liquidity premium embedded in the rate on top of the expected future spot rate |
| olagbami | the forward rate is higher than the expected future spot rate because of the maturity premium attached. |
| group | makes perfect sense |
| vi2009 | remium for holding onto the bond |
| examinee | makes perfect sense. that's why i love this site! |
| dbalakos | Because the yield curve is upward sloping in liquidity preference theory |