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

Buying shares of a company, Buying Shares of a Company Factors should ...

Buying Shares of a Company Factors should be refer when Buying Shares of a Company 1. Economic situation of the country and other non-economic factors as like unfavorable c

Calculate the return on equity, Maghrabi Enclosure follows a moderate curre...

Maghrabi Enclosure follows a moderate current asset investment policy, but it is considering whether to shift to a different strategy.  The firm's annual sales are $500,000; its fi

Corporate finance, I need report on Corporate Finance. Do you provide help ...

I need report on Corporate Finance. Do you provide help in topic Corporate Finance? I need expert's assistance to solve my college assignment. Please suggest if it works for me.

Vincent mind set, if u were the professor wht your opinion about vincent mi...

if u were the professor wht your opinion about vincent mind stage

Trading mechanism, Trading Mechanism 1. An investor approaches broker...

Trading Mechanism 1. An investor approaches brokers who obtain his bid or prefer to the trading floor. 2. At the trading floor, the selling and buying brokers meet and sea

Cash cycle and cash turnovers, Cash Cycle and Cash Turnovers Cash Cycl...

Cash Cycle and Cash Turnovers Cash Cycle refers to the amount of time which elapses from the point whenever the firms create a cash outlay to purchase raw materials to the poi

Private limited companies, Private Limited Companies These are NOT per...

Private Limited Companies These are NOT permitted to advertise their shares so like to attract public money and so that they sell their shares privately as recognized as priva

Gloria the Investor, Gloria the Investor Gloria is a seasoned sales manage...

Gloria the Investor Gloria is a seasoned sales manager with a very large international company. Although she has a great deal of experience with sales, she has little experience w

Classification of preference share capital, Classification of Preference Sh...

Classification of Preference Share Capital i) Redeemable Class Redeemable preferential shares are bought back via Issue Company after minimum redemption duration however

Bases of share valuation, Bases of Share Valuation Share valuation can...

Bases of Share Valuation Share valuation can be done on the basis of income and asset values. On the basis of income still a share will be entitled to two forms of income. For

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