Preferred Habitat Theory

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Preferred Habitat Theory
Theory that term of a security is based on predictions of future interest rate movement and risk premium. This theory rejects the assumption that risk premium increases with maturity terms.

On the contrary, when demand and supply for a specific maturity are out of sync investors may move to other maturity terms. The risk premium with the new investment will reflect their aversion to reinvestment risk and price.

Recommended for you:

  1. Market Segmentation Theory or Preferred Habitat Theory
  2. Normal Backwardation Theory
  3. Pure Expectations Theory
  4. Option Pricing Theory
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