Category: bond pricing

The liquidity preference theory of the term structure posits that investors demand a liquidity premium for holding long-term bonds relative to short-term bonds due to the added risk and uncertainty associated with tying up funds for an extended period. This liquidity premium compensates investors for forgoing the flexibility to react to changing market conditions or…

The expectations hypothesis of the term structure stands as a foundational concept for understanding the relationship between short-term and long-term interest rates. It provides valuable insights into bond market dynamics, yield curve behavior, and interest rate forecasting. In this lesson, we begin by introducing the key terms and, then, explain how this theory works with…