Of the four theories that explain how interest rates on bonds with different terms to maturity are related,the one that assumes that bonds of different maturities are not substitutes for one another is the
A) expectations theory.
B) segmented markets theory.
C) liquidity premium theory.
D) preferred habitat theory.

Question

Quizplus · Accepted Answer

The segmented markets theory assumes that bonds of different maturities are not substitutes for each other, and therefore their interest rates are determined independently. The expectations theory assumes that investors base their decisions on expectations of future interest rates, while the liquidity premium theory states that investors require additional compensation for investing in longer-term bonds because they are less liquid. The preferred habitat theory suggests that investors have specific maturity preferences but may be willing to invest outside of their preferred range if there is a sufficient compensation.

Of the Four Theories That Explain How Interest Rates on Bonds