The yield on a thirty-year Treasury bond is 8% at the same time as the yield on two-year Treasury note is 5%. This occurrence
A)indicates that the yield curve is downward sloping.
B)is well explained by the segmented markets theory.
C)is largely explained by the favorable tax treatment of Treasury notes.
D)indicates that the bond market is anticipating that inflation will fall.

Question

Quizplus · Accepted Answer

The segmented markets theory explains interest rates by the supply and demand for funds within each market segment (e.g., short-term vs. long-term bonds) without assuming that investors will substitute between segments. The difference in yields between the thirty-year Treasury bond and the two-year Treasury note can be explained by this theory, as it suggests that different investor preferences and supply/demand conditions in the long-term and short-term markets lead to different yields.

The Yield on a Thirty-Year Treasury Bond Is 8% at the Same