Interest Rate: Interest is charged by lenders as compensation for the loss of the asset's use.

In the case of lending money, the lender could have invested the funds instead of lending them out. With lending a large asset, the lender may have been able to generate income from the asset should they have decided to use it themselves.

Short-Term Interest Rate: The interest rate on a loan or other obligation with a maturity of less than one year. A commonly followed short-term interest rate is the rate on a Treasury bill. Short-term interest rates are also called money market rates. Long-term: Long-term interest rates are typically associated with investments or financing options lasting 10 years or more. Long-term interest rates may be more stable than short-term interest rates, although they can be subject to change prior to obtaining the investment or financing. What Does Biased Expectations Theory Mean? A theory that the future value of interest rates is equal to the summation of market expectations. Proponents of the biased expectation theory argue that the shape of the yield curve is created by ignoring systematic factors and that the term structure of interest rates is solely derived by the market's current expectations. Investopedia explains Biased Expectations Theory Two common biased expectation theories are the liquidity preference theory and the preferred habitat theory. The liquidity preference theory suggests that long-term bonds contain a risk premium and the preferred habitat theory suggests that the supply and demand for different maturity securities are not uniform and therefore there is a difference risk premium for each

What Does Speculation Mean? The process of selecting investments with higher risk in order to profit from an anticipated price movement. Investopedia explains Speculation Speculation should not be considered purely a form of gambling, as speculators do make an informed decision before choosing to acquire the additional risks. Additionally, speculation cannot be categorized as a traditional investment because the acquired risk is higher than average. More sophisticated investors will also use a hedging strategy in combination with their speculative investment in order to limit potential losses.

What Does Liquidity Preference Theory Mean? The hypothesis that forward rates offer a premium over expected future spot rates.

Investopedia explains Liquidity Preference Theory 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."

What Does Preferred Habitat Theory Mean? 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. Investopedia explains Preferred Habitat Theory The preferred habitat theory is an expansion on the expectations theory which suggests that long-term yields are an estimate of the future expected short-term yields. The reasoning behind the expectations theory is that bond investors only care about yield and are willing to buy bonds of any maturity, which in theory would mean a flat term structure unless expectations are for rising rates. The preferred habitat theory expands on the expectation theory by saying that bond investors care about both maturity and return. It suggests that short-term yields will almost always be lower than long-term yields due to an added premium needed to entice bond investors to purchase not only longer term bonds, but bonds outside of their maturity preference. Investopedia explains Liquidity Risk Usually reflected in a wide bid-ask spread or large price movements. What Does Liquidity Risk Mean? The risk stemming from the lack of marketability of an investment that cannot be bought or sold quickly enough to prevent or minimize a loss.

What Does Risk Premium Mean? The return in excess of the risk-free rate of return that an investment is expected to yield. An asset's risk premium is a form of compensation for investors who tolerate the extra risk compared to that of a risk-free asset - in a given investment.

Investopedia explains Risk Premium Think of a risk premium as a form of hazard pay for your investments. Just as employees who work relatively dangerous jobs receive hazard pay as compensation for the risks they undertake, risky investments must provide an investor with the potential for larger returns to warrant the risks of the investment. For example, high-quality corporate bonds issued by established corporations earning large profits have very little risk of default. Therefore, such bonds will pay a lower interest rate (or yield) than bonds issued by less-established companies with uncertain profitability and relatively higher default risk

Efficient markets An efficient market is one in which securities prices reflect all available information. This means that every security traded in the market is correctly valued given the available information. There are a number of different definitions of what constitutes an efficient market depending on the what information is deemed to be available.

Trading Security A debt or equity security bought and held for sale in the near term to generate income on shortterm price changes. What Does Held-to-Maturity Securities Mean? Debt securities that a firm has the ability and intent to hold until maturity. Investopedia explains Held-to-Maturity Securities These are reported at amortized cost, therefore, they are not affected by swings in the financial markets

What Does Available-For-Sale Security Mean? A debt or equity security that is purchased with the intent of selling before it reaches maturity, or selling prior to a lengthy time period in the event the security does not have a maturity. Accounting standards necessitate that companies classify any investments in debt or equity securities when they are purchased. The investments can be classified as: held to maturity, held for trading or available for sale. Investopedia explains Available-For-Sale Security An available-for-sale security is a debt or equity security that is not classified as a held-fortrading or held-to-maturity security. This type of security is reported at fair value; changes in

value between accounting periods are included in comprehensive income until the securities are sold.