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Unformatted text preview: Liquidity Preference : The premise is that investors will want to be compensated for holding any LT instruments. The longer the term to maturity, the more the inherent risk. Therefore, forward short rates will not be true predictors of future short rates due to a built in holding premium. Market Segmentation : A rising yield curve should only exist if all borrowers want to borrow LT, and investors want to buy ST to keep liquid. But, there are demand and supply conditions in the market that force some lenders and borrowers to shift their preferences. Banks must insure that the short/medium term demand deposits are not covered with locked in LT investments. Immunization -- holding periods are governed by the nature of the liabilities, and not necessarily the rates offered (incentives will have to be given to force the switch)....
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- Spring '08
- Yield Curve