Describe the liquidity preference theory
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Liquidity Preference Theory is a model that suggests that an investor should demand a higher interest rate or premium on securities with long-term maturities that carry greater risk because, all other factors being equal, investors prefer cash or other highly liquid holdings.
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ʟɪǫᴜɪᴅɪᴛʏ ᴘʀᴇғᴇʀᴇɴᴄᴇ ᴛʜᴇᴏʀʏ ɪs ᴀ ᴍᴏᴅᴇʟ ᴛʜᴀᴛ sᴜɢɢᴇsᴛs ᴛʜᴀᴛ ᴀɴ ɪɴᴠᴇsᴛᴏʀ sʜᴏᴜʟᴅ ᴅᴇᴍᴀɴᴅ ᴀ ʜɪɢʜᴇʀ ɪɴᴛᴇʀᴇsᴛ ʀᴀᴛᴇ ᴏʀ ᴘʀᴇᴍɪᴜᴍ ᴏɴ sᴇᴄᴜʀɪᴛɪᴇs ᴡɪᴛʜ ʟᴏɴɢ-ᴛᴇʀᴍ ᴍᴀᴛᴜʀɪᴛɪᴇs ᴛʜᴀᴛ ᴄᴀʀʀʏ ɢʀᴇᴀᴛᴇʀ ʀɪsᴋ ʙᴇᴄᴀᴜsᴇ, ᴀʟʟ ᴏᴛʜᴇʀ ғᴀᴄᴛᴏʀs ʙᴇɪɴɢ ᴇǫᴜᴀʟ, ɪɴᴠᴇsᴛᴏʀs ᴘʀᴇғᴇʀ ᴄᴀsʜ ᴏʀ ᴏᴛʜᴇʀ ʜɪɢʜʟʏ ʟɪǫᴜɪᴅ ʜᴏʟᴅɪɴɢs.
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