Liquidity Preference Explained

Now, we all know that the longer someone invests their moeney, they will want a better return.

In other words if the market wants people to invest for the longer term then it will need to make it worth their while.

Short term liquid stock has a lower risk attached to it than does the longer term, and therefore it requires a shorter return pro rate.

This will then ensure that it gives rise to the standard upward sloping yield curve.

Interestingly there can be an inversion that takes place in situations where there is a high yield environment.

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