Liquidity preference theory, Finance Basics

Assignment Help:

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.


Related Discussions:- Liquidity preference theory

Finance Assignment, I have an assignment for my finance class. The company ...

I have an assignment for my finance class. The company that i have FOR industry analysis is COSTCO WHOLESALES CORP THAT ITS STOCK IS IN DISCOUNT AND VARIETY StORES INDUSTRY. I need

Finance final, • Company X has $100,000 face value of outstanding bonds con...

• Company X has $100,000 face value of outstanding bonds consisting of 100 $1,000 face value bonds with a 4% annual coupon and 20 years remaining until maturity. The bonds are cur

What is nominal and real return, What is Nominal and Real Return Whi...

What is Nominal and Real Return While nominal return is the return in nominal rupees, real return is equal to the nominal return adjusted for changes in prices i.e. rate of

Making income statements, i have the information given but i am having trou...

i have the information given but i am having trouble getting the income statement done correctly

List three career opportunities in the field of finance, List and describe ...

List and describe the three career opportunities in the field of finance. Finance has three major career paths that are financial management, financial markets and institutions

WACC., The following is the existing capital structure of Company XYZ Ltd. ...

The following is the existing capital structure of Company XYZ Ltd. Ordinary shares at Shs.10 par 1,000,000 Retained 800,000 12% preference shares Shs.10 par 400,000 16% loan Shs.1

Describe the transaction structure-financing, Description of the deal, anal...

Description of the deal, analysis of abnormal returns & premium (a)  Describe the transaction structure, mode of payment, and financing.  (b) Give your comment/assessment of

Financial markets-securities and financial intermediaries, Describe the str...

Describe the structure of financial systems with financial markets, securities and financial intermediaries. By a structural point of view a financial system can be considered

Role of cma - share prices, Role of CMA - Share Prices Role of CMA in ...

Role of CMA - Share Prices Role of CMA in determination of share prices 1. The CMA does not in any type of way influence share price of quoted companies. 2. The prices o

Types of partners, Types of Partners 1. General Partners -Unlimited ac...

Types of Partners 1. General Partners -Unlimited active and liability in participation in partnership activities. 2. Limited partners - Limited liability in the management of

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd