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

Assignment, I have a question regarding assignment help, once completed, wi...

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

Dividend payout ratio, Dividend Payout Ratio Dividend payout ratio = (...

Dividend Payout Ratio Dividend payout ratio = (DPS/EPS) x 100                                     = Dividend paid/ Earning to ordinary shareholder This is the reci

Concepts in accounting, J inherited 30000 & decides to open a hair salon.ma...

J inherited 30000 & decides to open a hair salon.make arrangements 1/4/1016 commits 10000 to the business Opens an a/c under j hair salon What will be the amount under capital in

Distribution policies and fiscal, Distribution Policies   ...

Distribution Policies   Most Recent Fiscal Year Fiscal Year (-1) Fiscal Year (-2) Fiscal Year (-3)

Valuation a d rates of return, You are called in as a financial analyst to ...

You are called in as a financial analyst to appraise the bonds of Olsen’s Clothing Stores. The $1,000 par value bonds have a quoted annual interest rate of 13 percent, which is pai

Example of theoretical value, Example of Theoretical Value As a result...

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

Investment opportunity and capital structure, Investment Opportunity and Ca...

Investment Opportunity and Capital Structure Investment Opportunity Lack of suitable investment opportunities, that is so, by positive returns or N.P.V., may encourage a

Illustrate in brief about the investment process, Illustrate in brief abou...

Illustrate in brief about the Investment  Process A  typical  investment  decision  undergoes  a  five  step  procedure which, in turn, forms the foundation of investment pr

Fixed assets or sales ratio, Last year Nymphe Technologies had $450 million...

Last year Nymphe Technologies had $450 million of sales and $270 million of fixed assets, so its FA/Sales ratio was 60%.  However, its fixed assets were used at only 75% of capacit

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