Questions
Business Finance Exam 2 Practice
Single choice
According to the liquidity preference theory, how does the maturity risk premium (MRP) affect the yield curve?
Options
A.MRP is zero, flattening the curve.
B.MRP increases with maturity, steepening the upward slope.
C.MRP decreases with maturity, inverting the curve.
D.MRP is constant, having no effect.
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Step-by-Step Analysis
When examining the liquidity preference theory, the core idea is that longer-term securities carry greater risk and lower liquidity, so investors demand a higher return for holding them. This extra return is the maturity risk premium (MRP).
Option 1: 'MRP is zero, flattening the curve.' This is incon......Login to view full explanationLog in for full answers
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