According to the market segmentation theory of the term structure,
A) the interest rate for bonds of one maturity is determined by the supply and demand for bonds of that maturity.
B) bonds of one maturity are not substitutes for bonds of other maturities; therefore, interest rates on bonds of different maturities do not move together over time.
C) investors' strong preference for short-term relative to long-term bonds explains why yield curves typically slope upward.
D) all of the above.
E) none of the above.

Question

Quizplus · Accepted Answer

The market segmentation theory of the term structure posits that the interest rate for bonds of a specific maturity is determined by the supply and demand for bonds of that maturity, that bonds of different maturities are not perfect substitutes (hence, interest rates on bonds of different maturities do not necessarily move together), and that investor preferences can influence the shape of the yield curve, such as a preference for short-term bonds contributing to an upward-sloping yield curve.

According to the Market Segmentation Theory of the Term Structure