Discuss GARP 2016-FRR Exam Topic 2 Question 16

What is the explanation offered by the liquidity preference theory for the upward sloping yield curve shape?

AThe long term rates must rise enough to get some borrowers to borrow short-term and some lenders to lend long-term.

BThe long term rates must rise enough to get some borrowers to borrow long-term and some lenders to lend short-term.

CThe short term rates must rise enough to get some borrowers to borrow short-term and some lenders to lend long-term.

DThe short term rates must fall enough to get some borrowers to borrow long-term and some lenders to lend short-term.

Suggested Answer: B

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26 comments · newest first

Winifred 1 month ago

D is unlikely. Falling short-term rates don’t explain the curve well.

Ling 1 month ago

C seems off. Short-term rates shouldn’t dictate long-term borrowing.

Stefan 2 months ago

I prefer B. It’s about long-term borrowing incentives.

Samira 2 months ago

I think A makes sense. Long-term rates need to attract borrowers.

Sena 2 months ago

D is unlikely. Falling short-term rates don’t explain the curve well.

Myong 2 months ago

C seems off. Short-term rates shouldn’t dictate long-term borrowing.

Salome 2 months ago

I prefer B. It’s about getting long-term borrowing right.

Marge 2 months ago

I think A makes sense. Long-term rates need to attract borrowers.

Luann 3 months ago

D is unlikely. Falling short-term rates don’t explain the curve well.

Matilda 3 months ago

C seems off. Short-term rates shouldn't dictate long-term borrowing.

Malcom 3 months ago

I prefer B. It’s about long-term borrowing incentives.

Augustine 3 months ago

I think A makes sense. Long-term rates need to attract borrowers.

Ryan 3 months ago

I thought it was all about risk, not just rates!

Tamar 4 months ago

B) sounds plausible too, but I lean towards A).

Altha 5 months ago

Wait, are we sure about this? Seems a bit off to me.

Elvis 5 months ago

Totally agree, it makes sense for lenders to want higher returns on long-term loans.

Shizue 5 months ago

A) is the right choice!

Inocencia 6 months ago

I thought it was all about risk, not just rates!

Flo 6 months ago

B) sounds plausible too, but I lean towards A).

Corrina 6 months ago

Wait, are we sure about that? Seems a bit off to me.

Kathrine 6 months ago

Totally agree, it makes sense for lenders to want higher returns on long-term loans.

Barney 6 months ago

A) is the right choice!

Zack 6 months ago

I feel like option A makes the most sense, but I’m a bit confused about how it ties into the overall demand for liquidity.

Arleen 7 months ago

I practiced a similar question where it was about how borrowers choose between short and long-term loans. I think it was about lenders needing higher returns for longer commitments.

Lino 7 months ago

I think it has something to do with long-term rates needing to be higher to attract lenders, but I'm not sure which option that aligns with.

Galen 7 months ago

I remember liquidity preference theory suggests that investors prefer short-term securities due to lower risk, which might explain the upward slope.

GARP 2016-FRR Exam - Topic 2 Question 16 Discussion