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
Credit Standards A firm may follow a stringent or a lenient credit policy. The firm subsequent of a lenient credit policy tends to sell on credit to customers on extremely lib

Explain about the New Issue Market OR Primary Market New issue market is the segment in which new issues are made. In new issue market, new issues may be made in 3 ways name

Question: A non-zero coupon bond carries a coupon rate of 8 percent and has 9 years until maturity. It sells at a yield to maturity of 6 percent. The par value of the bond is

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 te


Why do several critics say the CAPM model is not suitable in an international setting? Please describe a way that the CAPM model could be adapted for international applications.

Describe the role of insurance companies. Role of Insurance Companies: The main objective of insurance companies is to prevent individuals and firms (termed as policy-hol


1)       What is the holding period return to an investor who bought 100 shares of Charter Oil nine months ago for $36 a share, received two $50 dividend checks, and sold the s

(a) A couple has just celebrated their 25th wedding anniversary. What is the probability of them celebrating their 50th wedding anniversary, if the husband is aged exactly 50, his