Sir
There is a MTQ question in cbe sample dec 2016 that which of the following statements is consistent with an upward-sloping yield curve?
Correct ans was :
Liquidity preference theory implies that short-term interest rates contain a premium over long-term interest rates to compensate for lost liquidity
But how this can be correct , what we have studied in liquidty preference theory is that the required return increases with the length of time for which the cash is unavailable, therefore, long-term interest rates are greater than short-term interest rates and the yield curve slopes upward
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Liquidity preference theory
7y ago#1But what you have typed is not given as the correct answer!!
The solution is given as:
"If default risk increases with duration, compensation for default risk increases with time and hence the yield curve will slope upwards."
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