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Preferred habitat theory

• A biased expectations theory that believes the term structure reflects the expectation of the future path of interest rates as well as risk premium. However, the theory rejects the assertion that the risk premium must rise uniformly with maturity. Instead, to the extent that the demand for and supply of funds does not match for a given maturity range, some participants will shift to maturities showing the opposite imbalances. As long as such investors are compensated by an appropriate risk premium whose magnitude will reflect the extent of aversion to either price or reinvestment risk.

 
 Embedded terms in definition
 Demand
Expectations
Future
Interest rate
Interest
Long
Maturity
Path
Premium
Range
Reinvestment risk
Reinvestment
Risk premium
Risk
Term structure
Will
 
 Related Terms
 

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