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How to calculate liquidity premium theory

06/10/2021 Client: muhammad11 Deadline: 2 Day

According to the liquidity premium theory of interest rates,

long-term spot rates are totally unrelated to expectations of future short-term rates.

the term structure must always be upward sloping.

investors prefer certain maturities and will not normally switch out of those maturities.

long-term spot rates are higher than the average of current and expected future short-term rates.

investors are indifferent between different maturities if the long-term spot rates are equal to the average of current and expected future short-term rates.

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