The market segmentation theory is able to explain why interest rates on bonds of different maturities move together over time.

Question

Quizplus · Accepted Answer

The market segmentation theory suggests that the bond market is segmented on the basis of maturity, with investors having specific maturity preferences, and does not necessarily explain why interest rates on bonds of different maturities move together over time. This phenomenon is more closely associated with the expectations theory, which posits that long-term interest rates are a reflection of market expectations for future short-term rates.

The Market Segmentation Theory Is Able to Explain Why Interest