Question

Required return of different maturities as well as different securities with the same maturity are different. Why? Explain your answer.

Answer 1

Required return has a direct relationship with the risk involved in a security. When risk id high investors demand high return. Therefore, even for same maturity the required return of two different securities can be very different. A treasury note will have a lower return required than a corporate bond of the same maturity. In the same way, required return for stocks are greater than bonds.

Required return varies with maturity too. If liquidity is preferred by the investors then for higher duration securities, investors would demand higher return to give up on their liquidity preference. Long term maturity carries a risk of interest rate changes with it too. Also, short term securities may be less likely to default. Also, expectations of rising or falling interest rates in the future can impact the required returns for long and short term maturities. Inflation expectations also have an impact on this

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