Assuming a mild preference for shorter-term bonds, the liquidity premium theory suggests that a flat yield curve is an indication of: A) constant short-term interest rates in the near and further future. B) a slight rise in short-term interest rates in the near future and a slight decline in the further future. C) constant short-term interest rates in the near future and a slight decline in the further future. D) a slight decline in short-term interest rates in the near and further future. Support your answer using a numerical example and explain carefully all the assumptions you make.

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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Assuming a mild preference for shorter-term bonds, the liquidity premium theory suggests that a flat yield curve is an indication of:

A) constant short-term interest rates in the near and further future.

B) a slight rise in short-term interest rates in the near future and a slight decline in the further future.

C) constant short-term interest rates in the near future and a slight decline in the further future.

D) a slight decline in short-term interest rates in the near and further future.

Support your answer using a numerical example and explain carefully all the assumptions you make. 

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