Under liquidity preference theory, which of the following is always true?
A. The forward rate is higher than the spot rate when both have the same maturity.
B. Forward rates are unbiased predictors of expected future spot rates.
C. The spot rate for a certain maturity is higher than the par yield for that maturity.
D. Forward rates are higher than expected future spot rates.
D
Liquidity preference theory argues that individuals like their borrowings to have a long maturity and their deposits to have a short maturity. To induce people to lend for long periods forward rates are raised relative to what expected future short rates would predict.
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