The market segmentation theory suggests that the shape of the yield curve is determined by the supply and demand for funds within each maturity segment.

Question

Quizplus · Accepted Answer

The market segmentation theory proposes that the yield curve reflects the supply and demand for funds within different maturity segments, resulting in different yields for each segment. This theory suggests that investors have a preference for certain maturities, and they are willing to pay higher or lower prices to obtain the desired funds. As a result, the yield curve can be upward or downward sloping, depending on the relative supply and demand for each maturity segment.

The Market Segmentation Theory Suggests That the Shape of the Yield