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What is the assumption behind the liquidity Preference Theory?

What is the assumption behind the liquidity Preference Theory?

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Liquidity of the investors is the basic assumption of liquidity preference theory. It states that investors demand more premium on long term financial instruments to sacrifice liquidity. For short term instruments the interest rates will be low because investors are not ready to give up their liquidity which is cash and cash equivalents.

Investors demand higher risk premium for long term securities because of the risk involved than the short term instruments.

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