CFA Practice Question

There are 147 practice questions for this study session.

CFA Practice Question

Which statement is TRUE regarding the liquidity preference theory?

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.
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