Liquidity Preference Theory

The hypothesis that forward rates offer a premium over expected future spot rates.

Investopedia Says:
Proponents of this theory believe that, according to the term structure of interest rates, investors are risk-averse and will demand a premium for securities with longer maturities. A premium is offered by way of greater forward rates in order to attract investors to longer-term securities. The premium received normally increases at a decreasing rate due to downward pressure from the decreasing volatility of interest rates as the term to maturity increases.

Also known as "liquidity preference hypothesis."

In Keynesian Economics , the desire by investors to hold their money in liquid assets, such as checking accounts, rather than nonliquid assets (stocks, bonds, real estate). This preference is explained by: (1) a transactional motivation, or the desire to keep money available for spending as needed; (2) a precautionary motivation, characterized by the reluctance to keep money tied up in assets not readily convertible to cash; and (3) the speculative motive, a belief that interest rates may be going up in the future. According to the Keynesian theory, Interest is the payment to investors to persuade them to give up their liquidity. Longer-term investments, therefore, would command higher rates over shorter-term investments. This premium is known as the liquidity premium. Contrast with Expectations Theory.