Liquidity preference theory, Finance Basics

Liquidity Preference Theory

This theory states that short term bonds are extremely favorable than long term bonds for two (2) purposes.

1. Investors usually prefer short term bonds to long-term securities since such securities are extremely liquid in the sense such they can be converted to cash along with little danger of loss of principal. Hence - investors will agree to lower yields on short term securities.

2. At the same that time borrowers react in just the opposite way.

Usually borrowers prefer long term debt since short-term debt exposes them to the risk of having to repay the debt under adverse. In this situation, accordingly borrowers are willing to pay higher rate another things held constant for long-term procedure than short ones.

Taking together this two sets of preferences implies under such usual conditions, a positive maturity risk premium exist that increases by maturity hence the yield curve should be upward sloping. Lenders prefer liquidity like short term hands whereas borrowers prefer long term bonds and are willing to pay a "premium" for long term borrowing.

Posted Date: 1/30/2013 2:58:16 AM | Location : United States







Related Discussions:- Liquidity preference theory, Assignment Help, Ask Question on Liquidity preference theory, Get Answer, Expert's Help, Liquidity preference theory Discussions

Write discussion on Liquidity preference theory
Your posts are moderated
Related Questions
system integration and infrastructure development is the

Ask questioSay that a buyer of bonds values good bonds at $500 and values bad bonds at $250. Sellers of both good and bad bonds value them at $350. If the fraction of good sellers

a.  In the accompanying diagram (which represents the market for chocolate candy bars), the initial equilibrium is at the intersection of S1 and D1. Circle the new equilibrium if t

Example of Theoretical Value As a result of the purchase of an asset, the income stream will rise by of £1,000 per annum for 25 years.  By assuming a discount rate of 20 perce

What does it mean to say that individuals as a group are net suppliers of funds for financial institutions? What do you think the consequences might be in financial markets if indi

Do you guys provide Cost of Debentures assignment help. I need writing a report on Cost of Debentures and it is about 2000 words. Let me know. I need to buy your solution.

I have a question regarding assignment help, once completed, will I receive the assignment via email?

I am struggling with a PowerPoint Presentation 8-10 slide the calculations and understanding Traditional IRAs and Roth IRAs, I guess that I need to prepare this for an audience. Sh

In 1998, the Syndicated Bank Loan market (defined as loans having more than two bank lenders) was a vast and cheap source of debt financing for U.S. corporations.  This market was

Consider a binomial model of a risky asset with the parameters r = 0:06, u = 0:059, d = 0:0562, S 0 = 100, T = 1, 4t = 1=12. Note that u and d are monthly effective rates of retur