Question #17
Reading: Reading 25 The Term Structure and Interest Rate Dynamics
PDF File: Reading 25 The Term Structure and Interest Rate Dynamics.pdf
Page: 6
Status: Unattempted
Correct Answer: A
Question
Under the liquidity preference theory, expected future spot rates will most likely be:
Answer Choices:
A. More than the current forward rate
B. Less than the current forward rate
C. Equal to the current forward rate
Explanation
Existence of a liquidity premium under the liquidity preference theory implies that the
current forward rate is an upwardly biased estimate of the future spot rate.