[Verse 1] When investors buy a bond today They're lending money for a certain way Short term feels safe, they sleep at night But long term bonds can give a fright The future's murky, risks run deep What will inflation rates soon keep So lenders ask for something more A premium to even the score [Chorus] Liquidity preference shows the way Why yield curves slope up day by day Longer bonds need higher rates 'Cause uncertainty never waits Risk premium climbs with every year That's why the curve bends up from here [Verse 2] Picture Sarah with cash to lend She could loan for months or years on end Six months out, she knows the scene But twenty years? Who knows what's been Interest rates might jump around Economic storms might shake the ground So Sarah says "If you want my gold For decades long, more yield I'm sold" [Chorus] Liquidity preference shows the way Why yield curves slope up day by day Longer bonds need higher rates 'Cause uncertainty never waits Risk premium climbs with every year That's why the curve bends up from here [Bridge] Short rates low, long rates high Risk premium reaching for the sky Time adds danger, time adds cost Without premium, lenders get lost [Verse 3] Every bond along the line Needs compensation by design The longer that maturity The bigger the uncertainty This theory helps us understand Why curves slope up across the land It's not just supply and demand It's risk that makes lenders take a stand [Chorus] Liquidity preference shows the way Why yield curves slope up day by day Longer bonds need higher rates 'Cause uncertainty never waits Risk premium climbs with every year That's why the curve bends up from here [Outro] So when you see that upward slope Remember why lenders need more hope Liquidity preference theory's clear Longer time means premiums appear
← Term Structure: Market Segmentation Theories | Term Structure Theories: Expectations →