6. Liquidity premium theory Which of the following is consistent with the liquidity premium theory of the yield curve? Check all that apply. If liquidity influences the yield curve, an upward-sloping yield curve suggests that the market thinks interest rates in the future will increase. If liquidity influences the yield curve, a flat yield curve suggests that the market thinks interest rates in the future will remain the same. If liquidity influences the yield curve, a flat yield curve suggests that the market thinks interest rates in the future will decrease. If liquidity influences the yield curve, an upward-sloping yield curve suggests that the market thinks interest rates in the future will decrease. Lucia would like to invest a certain amount of money for two years and considers investing in a one-year bond that pays 3 percent and a two- year bond that pays 7 percent. Lucia is considering the following investment strategies: Strategy A: Buy a one-year bond that pays 3 percent and in year one, then buy another one-year bond that pays the forward rate in year two. Strategy B: Buy a two-year bond that pays 7 percent in year one and 7 percent year two. If the one-year bond purchased in year two pays 7 percent, and the liquidity premium on a two-year bond is 0.7 percent, Lucia will choose Which of the following describes conditions under which Lucia would be indifferent between Strategy A and Strategy B? The rate on the one-year bond purchased in year two is 10.476 percent. The rate on the one-year bond purchased in year two is 10.790 percent. The rate on the one-year bond purchased in year two is 11.209 percent. The rate on the one-year bond purchased in year two is 9.952 percent