The liquidity premium theory of the term structure
A) assumes investors tend to prefer short-term bonds because they have less interest-rate risk.
B) assumes that interest rates on the long-term bond respond to demand and supply conditions for that bond.
C) assumes that an average of expected short-term rates is an important component of interest rates on long-term bonds.
D) assumes all of the above.
E) assumes none of the above.
Answer: D) assumes all of the above.