Liquidity Preference Theory
The hypothesis that forward rates offer a premium over expected future spot rates. Investopedia Says:
Proponents of this theory believe that, according to the term structure of interest rates, investors are risk-averse and will demand a premium for securities with longer maturities. A premium is offered by way of greater forward rates in order to attract investors to longer-term securities. The premium received normally increases at a decreasing rate due to downward pressure from the decreasing volatility of interest rates as the term to maturity increases.
Also known as "liquidity preference hypothesis." Related Terms:
Forward Rate
Keynesian Economics
Liquidity
Liquidity Trap
Term Structure of Interest Rates |