<P> 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: </P> <Dl> <Dd> (1 + i l t) n = r p n + ((1 + i s t y e a r 1) (1 + i s t y e a r 2) ⋯ (1 + i s t y e a r n)) (\ displaystyle (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)))) </Dd> </Dl> <Dd> (1 + i l t) n = r p n + ((1 + i s t y e a r 1) (1 + i s t y e a r 2) ⋯ (1 + i s t y e a r n)) (\ displaystyle (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)))) </Dd> <P> Where r p n (\ displaystyle rp_ (n)) is the risk premium associated with an n (\ displaystyle (n)) year bond . </P>

The us yield curve affects which of the following entities