According to the liquidity premium theory of interest rates

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According to the liquidity premium theory of interest rates, 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. 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 totally unrelated to expectations of future short-term rates.

Reference no: EM13728195

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