I want to understand the yield curve with the liquidity premium hypothesis. Suppose that the spot rate for one year maturity is 5 per cent. Then the expected future short rates are 5 per cent for each year. In this case, the liquidity premium will be 1 per cent. I was looking at the yield curve. It shows that the yield curve is upward sloping, but after a point, it becomes a straight line. Can someone explain this.
I did try thinking through it. I can understand that it should be upward sloping. But why it becomes constant after a point.