THEORIES

1. Expectations Theory
Expectation theory attempts to predict what future short-term interest rates
will be based on current long-term interest rates. According to this theory, an
investor, instead of investing in a 2-year bond today, could get the same
interest if he invested in a 1-year bond two times in a row. The theory is also
reffered as the "unbiased expectations theory."

2. Liquidity Preference Theory

Liquidity preference theory states that, all other things being equal, investors
prefer cash or other highly liquid holdings, and therefore investors are more
willing to invest in riskier, longer-maturity securities. A model that suggests
that an interest rate or premium should be charged.

3. Preferred Habitat Theory:

The preferred habitat theory states that various bond investors prefer one
maturity over another and are willing to buy bonds outside their desired
maturity only if risk premiums are available in other maturity ranges. is the
maturity structure hypothesis that suggests This theory also suggests that, all
else being equal, investors prefer to hold short-term bonds over long-term
ones.