According to the liquidity preference theory, which of the following statements

Question

According to the liquidity preference theory, which of the following statements is (are) correct? :l. Investors perceive little risk differential between short-term and long-term securities. :ll. Long-term rates should be higher than short-term rates because of the added risks. :lII. Borrowers will pay a premium for long term funds to avoid having to roll over short-term debt. :lV. All else equal, investors prefer short-term securities over long-term securities. a. I and IIl only Ob.I, I, IlI and IV c.II, I and IV only d. I, Il and IV only

Explanation / Answer

Longer the maturity, higher the risk. Borrower will have to compensate the bond holder for compensating risk undertaken. Usually investors prefer short-term because of higher liquidity.

Hence, correct option is (c) II,III and IV only.

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