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Question
The liquidity premium theory of the term structure of interest rates
A. assumes that investors will hold long-term maturity assets if there is a sufficient premium to compensate for the uncertainty of the long-term.
B. assumes that long-term interest rates are an arithmetic average of short-term rates plus a liquidity premium.
C. recognizes that forward rates are perfect predictors of future interest rates.
D. assumes that risk premiums increase uniformly with maturity.
E. None of the above.
Answer
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