CFA Practice Question

There are 147 practice questions for this study session.

CFA Practice Question

Which interest rate theory argues that investors prefer to own short-term bonds?

A. Liquidity preference.
B. Expectations hypothesis.
C. Market segmentation.
Correct Answer: A

Liquidity preference: a theory related to the term structure of interest rates. The theory states that the term structure tends to be upward sloping more than any other pattern. This reflects a recognition of the fact that long maturity obligations are subject to greater price change movements than short maturity obligations when interest rates change. Because of increased risk of holding longer-term maturities, investors demand a higher return to hold such securities. Thus they have a preference for short-term liquid obligations.

User Contributed Comments 3

User Comment
PhiWong For the liquidity preference, simply a premium is high enough to induce investor to invest in the long term? What about the Expectations Hypothesis? The inverted yield curve?
olagbami the inverted curve under expectations theory depicts dat investors think int rates will drop in d future. It only shows d state of mind of investors as regards future int rates, it does not say anything about the preference of investors for short-term bonds. read through the theories again if not convinced.
Richie188 inflation is what expectation hypothesis about. the inverted curve means the investors expect deflation instead of inflation.
You need to log in first to add your comment.