Chapter 6, Problem 18Q

To determine

What does a flat yield curve say about the liquidity premiums in the term structure. Would we be more or less willing to accept the expectations theory?

Concept Introduction:

Yield Curve: It represents the relationship between the yields of fixed interest securities and maturity period.

Expectation theory of term structure: It states that the returns on financial assets of different maturities are primarily related to the market expectations of future return.

Risk Premium: It is the minimum amount of money by which the expected return on a risky asset must exceed the return on a risk-free asset, so that an investor holds the risky asset.