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Yield Curves; Expectation Theory and Liquidity Premium

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If yield curves, on average, were flat, what would this say about the liquidity premiums in the term structure?

Would you be more willing or less willing to accept the expectation theory?

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Solution Summary

This solution discusses why the scenario makes the expectation theory more credible in 197 words.

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If the yield curves on average are flat, this will indicate that there is NO liquidity premium in the term structure of interest rates. This also means that the market thinks that the long term interest rates will be the same as short term interest rates. It is possible, however, that ...

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