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Suppose That Interest Rates Are Expected to Remain Unchanged Over

Question 7

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Suppose that interest rates are expected to remain unchanged over the next few years. However, there is a risk premium for longer-term bonds. According to the liquidity premium theory, the yield curve should be:


A) upward sloping and very steep.
B) upward sloping and relatively flat.
C) inverted.
D) vertical.

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