Yield to Maturity V Term to Maturity (a) We have studied the Liquidity Premium and Preferred Habitat Theory. The yield curve resulting from this theory is always above the one resulting from the expectations theory. Why does this difference between the two yield curves exist? (4 marks) (b) Explain, using the liquidity premium theory, why a at yield curve indicates short-term interest rates are expected to fall moderately. Because according to liquidity premium theory, Short-term securities are less risky compared to long-term rates due to the di'erence in maturity dates. Therefore, investors expect a premium, or risk premium for investing in the risky security