What factors cause the supply of funds curve to shift?

Answer :

What should happen to a security’s nominal interest rate as the security’s liquidity risk increases?

Answer:

How does liquidity premium theory of the term structure of interest rates differ from the unbiased
expectation theory? In 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:

The liquidity premium theory assumes bonds of different maturities are substitutes. The interest rate on
a long term bond will equal the average of the short-term interest rates expected to occur over the life
of the long-term bond plus a liquidity premium that responds to supply and demand conditions for that
bond. The Unbiased Expectations Theory states that long term interest rates hold a forecast for short
term interest rates in the future. The liquidity premium theory is more plausible than the the unbiased
expectation theory bec. it explains the return or yield on the basis of the risk involves in taking the
bonds. The longer the expiration, the larger the risk .

It is considered under the liquidity premium theory the risks associated with long-term bonds: notably
interest rate risk and inflation risk. Increased risk will lower demand for these bonds, in turn, increasing
their yield. This increase in yield is the risk premium to compensate the buyer of long term bonds for
their increased risk. The liquidity premium increases with the term of the bond.

What is the relationship between present values and interest rates as interest rates increase?

Answer:

Discuss and compare the three explanations for the shape of the yield curve?

(Chegg.com)