CIMA BA1 · Chapter 12 · Question 9 of 9
A normal yield curve slopes upwards, with longer-term interest rates higher than short-term rates. Which of the following helps to explain this?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) Investors require a liquidity premium to compensate for tying up funds for longer
Explanation
Liquidity preference theory states that lenders prefer liquidity and require extra return for lending long. Expectations theory adds that an upward slope reflects expected rises in short-term rates. Expected falls in rates would tend to produce a downward-sloping (inverted) curve.
More The financial system, money and interest rates MCQs
- Q2Banks and building societies accept short-term deposits and make long-term loans. This process is known as:
- Q3A bank receives a new cash deposit of $50,000. All banks maintain a reserve ratio of 8% and there are no cash leakages. What is the…
- Q4The money markets are best described as markets for:
- Q5Which of the following is NOT normally a function of a central bank?
- Q6A bond with a nominal value of $100 pays an annual coupon of 6% and has a current market price of $80. What is its interest (running) yield?