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The liquidity preference theory primarily posits that investors prefer assets that can be easily converted into cash at minimal cost; this directly impacts their behavior toward different maturities of bonds. Short-term bonds typically have shorter maturities, meaning they mature sooner and can be converted back into cash more rapidly. This characteristic aligns with the concept of liquidity, as investors looking to maintain access to cash often prefer these instruments.

Moreover, investors generally perceive short-term bonds to come with lower risk compared to longer-term bonds. This perception arises from the fact that over shorter time frames, there’s less uncertainty regarding interest rate fluctuations and inflation impacts on bond prices. Therefore, investors consider short-term bonds less risky and, as a result, favor them when concerned about liquidity and market conditions.

In contrast, long-term bonds, while often offering higher yields, carry greater potential risks related to interest rate changes and inflation over extended periods. Thus, they may not be as attractive to liquidity-preferring investors. This context reinforces why distinguishing short-term bonds as less liquid and perceived as less risky aligns perfectly with the principles of liquidity preference theory.