The ____ theory holds that the securities markets are demarcated by maturity.
A) boondoggle
B) liquidity premium
C) expectations
D) market segmentation

Question

Quizplus · Accepted Answer

The market segmentation theory is based on the belief that the securities market is divided by maturity. This theory states that interest rates for short-term and long-term securities are determined independently and do not affect each other. As a result, investors have a preference for certain maturities based on their financial goals and risk tolerance. This theory contradicts the expectations theory, which suggests that long-term and short-term rates are connected and that investors are indifferent about maturities. The liquidity premium theory suggests that investors require a premium for holding long-term bonds to compensate for the additional risk of tying up their money for a longer period. The term boondoggle refers to a wasteful or unnecessary project or activity.

The ____ Theory Holds That the Securities Markets Are Demarcated