Preferred habitat theory

Definition: [crh] A biased expectations theory that believes the term structure reflects the expectation of the future path of Definition: REF="/?rd=interest+rates">interest rates as well as risk premium. The theory rejects the assertion that the risk premium must rise Definition: uniformly with maturity, but instead profits that to the extent that the demand for and supply of funds do not match for a given maturity Definition: F="/?rd=range">range, some participants will shift to maturities showing the opposite imbalances, as long as they are compensated by an appropriate risk premium whose magnitude will reflect the eDefinition: xtent of aversion to either price or reinvestment risk.

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