liquidity premium theory
Definition
Suggests that since investors are risk averse, they will demand a greater premium for securities with longer maturity periods as these are not easily convertible to cash on short notice. A liquidity premium is usually added to the equilibrium interest rate to determine the market rate of securities.
Use this term in a sentence
“ The liquidity premium theory was a really good theory in my opinion and I thought it applied to us greatly. ”
“ You should try and read up on the liquidity premium theory and figure out a way to use it to your advantage. ”
“ The liquidity premium theory was proved during the business meeting when one employee said cash is king and the CEO agreed. ”
