BUISENESS MANAGEMENT
FINANCIAL MANAGEMENT
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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investors generally prefer to invest short periods of time
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government policy maintains this relationship
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there is greater risk in long-term bonds
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exchange rate fluctuations establish this relationship
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Detailed explanation-1: -• Liquidity premium theory asserts that bondholders greatly prefer to hold. short-term bonds rather than long-term bonds. Short-term bonds have. less interest rate risk than long-term bonds, because their prices change. less for a given changes in interest rates.
Detailed explanation-2: -Answer and Explanation: The liquidity premium theory of term structure generally asserts the fact that people do prefer liquid assets more often due to fewer interest risks in short-term assets. This theory does not say that anyone’s maturity bond could be called as the substitute of the bond with different maturity.
Detailed explanation-3: -Key Takeaways. When interest rates rise, bond prices fall (and vice-versa), with long-maturity bonds most sensitive to rate changes. This is because longer-term bonds have a greater duration than short-term bonds that are closer to maturity and have fewer coupon payments remaining.
Detailed explanation-4: -Long-term rates tend to be higher than short-term rates because both interest rate risk and default risk go up with time. When short-term rates move higher than long-term rates, an inversion occurs.