The market segmentation theory holds that
A) an increase in demand for long-term borrowings leads to an inverted yield curve.
B) expectations about the future level of interest rates is the major determinant of the shape of the yield curve.
C) the yield curve reflects the maturity preferences of financial institutions and investors.
D) the shape of the yield curve is always downsloping.

Question

Quizplus · Accepted Answer

The market segmentation theory suggests that the yield curve reflects the maturity preferences of financial institutions and investors, meaning that different segments of the bond market (short-term, intermediate-term, and long-term) are dominated by different groups of investors with specific maturity preferences. This theory does not necessarily predict the shape of the yield curve (e.g., upward sloping, flat, or inverted) but explains it through the supply and demand within each segment.

The Market Segmentation Theory Holds That