According to the liquidity premium theory of the term structure
A) because buyers of bonds may prefer bonds of one maturity over another, interest rates on bonds of different maturities do not move together over time.
B) the interest rate on long-term bonds will equal an average of short-term interest rates that people expect to occur over the life of the long-term bonds plus a term premium.
C) because of the positive term premium, the yield curve will not be observed to be downward sloping.
D) the interest rate for each maturity bond is determined by supply and demand for that maturity bond.
Answer: B
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