The market segmentation theory of the term structure of interest rates
A)assumes that investors will hold long-term maturity assets if there is a sufficient premium to compensate for the uncertainty of the long-term.
B)assumes that the yield curve reflects the market's current expectations of future short-term interest rates.
C)assumes that market rates are determined by supply and demand conditions within fairly distinct time or maturity buckets.
D)fails to recognize that forward rates are not perfect predictors of future interest rates.

Question

Quizplus · Accepted Answer

The market segmentation theory of the term structure of interest rates assumes that market rates are determined by supply and demand conditions within fairly distinct time or maturity buckets. This means that investors have certain preferences for investing in assets with specific maturities, and therefore, demand and supply conditions within these time buckets will determine the corresponding interest rates. The theory does not specifically address the uncertainty or expectations of future interest rates, so options A and B are not correct. Option D is also incorrect, as the theory does not rely on forward rates as predictors of future interest rates.

The Market Segmentation Theory of the Term Structure of Interest