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Basic Question 4 of 10

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

A. Liquidity preference.
B. Expectations hypothesis.
C. Market segmentation.
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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.
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I passed! I did not get a chance to tell you before the exam - but your site was excellent. I will definitely take it next year for Level II.
Tamara Schultz

Tamara Schultz

Learning Outcome Statements

explain traditional theories of the term structure of interest rates and describe the implications of each theory for forward rates and the shape of the yield curve;

CFA® 2025 Level II Curriculum, Volume 4, Module 26.