The preferred habitat theory holds that investors
A)always choose the bond with the highest expected return, regardless of maturity.
B)require a term premium to compensate them for investing in a less preferred maturity.
C)view bonds of different maturities as perfect substitutes.
D)view bonds of different maturities as completely unsubstitutable.

Question

Quizplus · Accepted Answer

The preferred habitat theory suggests that investors have a preference for certain maturity segments and require a term premium to compensate them for investing in maturities outside their preferred habitat. Therefore, option B is the correct answer as it reflects this idea. The other options do not accurately represent the theory.

The Preferred Habitat Theory Holds That Investors