- CFA Exams
- CFA Level I Exam
- Study Session 12. Fixed Income (1)
- Reading 32. The Term Structure and Interest Rate Dynamics
- Subject 5. Traditional Theories of the Term Structure of Interest Rates
CFA Practice Question
Which statement is TRUE regarding the liquidity preference theory?
II. The liquidity premium suggested by the liquidity preference theory does not apply to heavily traded (very liquid) bonds.
I. Liquidity preference theory always predicts an upward-sloping yield curve.
II. The liquidity premium suggested by the liquidity preference theory does not apply to heavily traded (very liquid) bonds.
Correct Answer: Both are false
I: The existence of liquidity premiums implies that the yield curve will typically be upward sloping. However, a downward-sloping yield curve is still possible.
II: It is a premium applying to all long-term bonds, including those with deep markets.
User Contributed Comments 1
| User | Comment |
|---|---|
| alejandroc | Weirdly enough, the liquidity pref. theory does not include a liquidity premium per se. Rather, it incorporates the interest rate risk related to changes in the yield curve. |