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Preferred habitat theory


A biased expectations theory which rejects the assertion that the risk premium must rise uniformly with maturity. Instead, the extent that the demand for and supply of funds i-,l a given maturity range do not match will induce some participants to shift to maturities showing the opposite imbalances. However, such investors will need to be compensated by an appropriate risk premium whose magnitude will reflect the extent of aversion to either price or reinvestment risk.


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