Answered: Bond investors prefer short maturities.…

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter4: Bond Valuation

Section: Chapter Questions

Problem 9MC

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Question

Bond investors prefer short maturities. This is based on:

a.default risk

b.liquidity risk

c.maturity preference

d.expectations theory

Expert Solution

Step 1

Default risk is the risk that the bond issuer may go bankrupt and therefore may not be able to pay the bond investor the promised coupons and par value.

Liquidity risk is the risk long term bond holders face for investing in long term bonds as their money is tied up for a longer period of time. These investors will require a premium for this risk.

Maturity preference deals with market segmentation theory where bond investors will invest in maturities that they prefer.

Expectation theory states that long term interest rates can be determined by the spot interest rates and future expected interest rates.

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