Preferred habitat theory,
Definition of Preferred habitat theory:
A theory on the investing behavior of bond buyers, stating that individual investors have a preferred range of bond maturity lengths, and will only go outside of this range if a higher yield is promised. This theory also states that investors prefer shorter-term bonds to longer-term bonds.
The preferred habitat theory is a term structure theory suggesting that different bond investors prefer one maturity length over another and are only willing to buy bonds outside of their maturity preference if a risk premium for the maturity range is available. The theory also suggests that when all else is equal, investors prefer to hold short-term bonds in place of long-term bonds and that the yields on longer-term bonds should be higher than shorter-term bonds.
Securities in the debt market can be categorized into three segments—short-term, intermediate-term, and long-term debt. When these term maturities are plotted against their matching yields, the yield curve is shown. The movement in the shape of the yield curve is influenced by a number of factors including investor demand and supply of the debt securities. .
How to use Preferred habitat theory in a sentence?
- Meanwhile, market segmentation theory suggests that investors only care about yield, willing to buy bonds of any maturity. .
- The preferred habitat theory suggests that all else equal, investors should prefer shorter-term bonds over longer-term—meaning yields on long-term bonds should be higher.
- Investors are only willing to buy outside of their preferences if enough of a risk premium (higher yield) is embedded in the other bonds.
- Preferred habitat theory says that investors prefer certain maturity lengths over others when it comes to the term structure of bonds. .
Meaning of Preferred habitat theory & Preferred habitat theory Definition
