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Q-10-391

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Essentials Of Investments
Found in: Page 332
Essentials Of Investments

Essentials Of Investments

Book edition 9th
Author(s) Zvi Bodie, Alex Kane, Alan Marcus, Alan J. Marcus
Pages 748 pages
ISBN 9780078034695

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Short Answer

Question: Under the liquidity preference theory, if inflation is expected to be falling over the next few years, long-term interest rates will be higher than short-term rates. True/false/ uncertain? Why?

Answer

Uncertain

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Step by Step Solution

Step 1: Definition

As per the liquidity preference theory, a higher rate of interest on securities should be demanded by an investor on long term maturities.

Step 2: Explanation on liquidity preference theory

If the liquidity premium is great, long-term yields can even exceed short-term yields despite having expectations of falling short rates. Thus, the interest rates in the long-term will be higher than in the short run.

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