LIQUIDITY PREFERENCE THEORY
The theory which states that investors insist on having a premium for securities with longer maturities and greater risk because they prefer holding on to cash with less risk. The more liquid an investment, the easier it is to sell on a full value. The premium on short-term versus medium-term securities will be higher than on medium-term versus long-term securities, for interest rates are more fluctuating in the short-term. Also called liquidity preference, UK Economist John Maynard Keynes first formulated this concept.
For instance, a four-year Treasury note might pay 1% interest rate; a 11-year Treasury bond, 3% interest, and 33-year Treasury note, 4% interest.
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Original Cost
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