Editing Yield curve (section)

===Liquidity premium theory===
The liquidity premium theory is an offshoot of the pure expectations theory. The liquidity premium theory asserts that long-term interest rates not only reflect investors' assumptions about future interest rates but also include a premium for holding long-term bonds (investors prefer short-term bonds to long-term bonds), called the term premium or the liquidity premium. This premium compensates investors for the added risk of having their money tied up for a longer period, including the greater price uncertainty. Because of the term premium, long-term bond yields tend to be higher than short-term yields and the yield curve slopes upward. Long-term yields are also higher not just because of the liquidity premium, but also because of the risk premium added by the risk of default from holding a security over the long term. The market expectations hypothesis is combined with the liquidity premium theory:

: <math>(1 + i_{lt})^n=rp_{n}+((1 + i_{st}^{\mathrm{year }1})(1 + i_{st}^{\mathrm{year }2}) \cdots (1 + i_{st}^{\mathrm{year }n})),</math>

where <math>rp_n</math> is the risk premium associated with an <math>{n}</math> year bond.