Liquidity Preference Theory
- Liquidity Preference Theory
The idea that investors demand a premium for securities with longer maturities, which entail greater risk, because they would prefer to hold cash, which entails less risk. The more liquid an investment, the easier it is to sell quickly for its full value. Because interest rates are more volatile in the short term, the premium on short- versus medium-term securities will be greater than the premium on medium- versus long-term securities. For example, a three-year Treasury note might pay 1% interest, a 10-year treasury note might pay 3% interest and a 30-year treasury bond might pay 4% interest.
Economist John Maynard Keynes describes liquidity preference theory in Chapter 13, "The General Theory of the Rate of Interest," of his famous book, "The General Theory of Employment, Interest and Money." Keynes said that people value money for both "the transaction of current business and its use as a store of wealth." Thus, they will sacrifice the ability to earn interest on money that they want to spend in the present, and that they want to have it on hand as a precaution. On the other hand, when interest rates increase, they become willing to hold less money for these purposes in order to secure a profit.
Investment dictionary.
Academic.
2012.
Look at other dictionaries:
Liquidity preference — Finance Theory = John Maynard Keynes developed the Liquidity Preference of Interest in the General Theory of Employment Interest and Money. The primary consideration of the liquidity preference is the demand for money as an asset, as a means for… … Wikipedia
liquidity preference — (1) A desire among some holders of financial instruments to keep some or all of their funds in liquid instruments, that is, instruments that either mature in a short period of time or that can be readily sold with small risk of loss. (2) A theory … Financial and business terms
liquidity preference — (in Keynesian economics) the degree of individual preference for cash over less liquid assets. [1935 40] * * * In economics, the premium that holders of wealth demand for exchanging ready money or bank deposits for safe, nonliquid assets such as… … Universalium
Liquidity preference hypothesis — The argument that greater liquidity is valuable, all else equal. Also, the theory that the forward rate exceeds expected future interest rates. The New York Times Financial Glossary … Financial and business terms
liquidity preference hypothesis — The argument that greater liquidity is valuable, all else equal. Also, the theory that the forward rate exceeds expected future interest rates. Bloomberg Financial Dictionary … Financial and business terms
Liquidity trap — A liquidity trap is a situation described in Keynesian economics in which injections of cash into an economy by a central bank fail to lower interest rates and hence to stimulate economic growth. A liquidity trap is caused when people hoard cash… … Wikipedia
Biased Expectations Theory — A theory that the future value of interest rates is equal to the summation of market expectations. Proponents of the biased expectation theory argue that the shape of the yield curve is created by ignoring systematic factors and that the term… … Investment dictionary
Modern portfolio theory — Portfolio analysis redirects here. For theorems about the mean variance efficient frontier, see Mutual fund separation theorem. For non mean variance portfolio analysis, see Marginal conditional stochastic dominance. Modern portfolio theory (MPT) … Wikipedia
Quantity theory of money — In economics, the quantity theory of money is a theory emphasizing the positive relationship of overall prices or the nominal value of expenditures to the quantity of money. Origins and development of the quantity theory The quantity theory… … Wikipedia
The General Theory of Employment, Interest, and Money — infobox Book | name = The General Theory of Employment, Interest and Money author = John Maynard Keynes country = United Kingdom language = English genre = Nonfiction publisher = Palgrave Macmillan release date = 1936 media type = Print Paperback … Wikipedia