# Question

How does the liquidity premium theory of the term structure of interest rates differ from the unbiased expectations theory? In a normal economic environment, that is, an upward-sloping yield curve, what is the relationship of liquidity premiums for successive years into the future? Why?

## Answer to relevant Questions

What is the relationship between present values and interest rates as interest rates increase?Suppose we observe the following rates: 1R1 = 10%, 1R2 = 14% and E(2r1) = 10%. If the liquidity premium theory of the term structure of interest rates holds, what is the liquidity premium for year 2?What happens to the fair present value of a bond when the required rate of return on the bond increases?Johnson Motors’s bonds have 10 years remaining to maturity. Interest is paid annually, the bonds have a $ 1,000 par value, and the coupon rate is 8 percent. The bonds have a yield to maturity of 9 percent. What is the ...Calculate the fair present value of the following bonds, all of which have a 10 percent coupon rate (paid semiannually), face value of $ 1,000, and a required rate of return of 8 percent.a. The bond has 10 years remaining to ...Post your question

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