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 downward.
D) only A and B of the above.

Question

Quizplus · Accepted Answer

The market segmentation theory suggests that the interest rate for bonds of a specific maturity is determined by the supply and demand for bonds of that maturity (A), and it posits that bonds of different maturities are not perfect substitutes for each other, leading to the conclusion that interest rates on bonds of different maturities do not necessarily move together over time (B).

According to the Market Segmentation Theory of the Term Structure