The segmented markets theory of term structure:
A) explains upward-sloping yield curves as a result of the demand for long-term bonds being high, relative to the demand for short-term bonds.
B) explains upward-sloping yield curves as a result of the demand for long-term bonds being low, relative to the demand for short-term bonds.
C) explains upward-sloping yield curves as a result of the favourable tax treatment of long-term bonds.
D) is unable to explain upward-sloping yield curves.

Question

Quizplus · Accepted Answer

The segmented markets theory of term structure states that the market for long-term bonds and the market for short-term bonds are separate and segmented. It explains upward-sloping yield curves as a result of the demand for long-term bonds being low, relative to the demand for short-term bonds. This is because investors have different preferences and needs, and may have different expectations for inflation and interest rates in the future. Therefore, investors are willing to pay a premium for the security of short-term bonds, driving up their prices and lowering their yields, while long-term bonds have a lower demand and higher yields.

The Segmented Markets Theory of Term Structure