Market segmentation theory explains the typical upward sloping shape of yield curves as a function of
A) normally greater demand for long-term bonds than for short-term notes.
B) normally greater demand for short term notes than for long-term bonds.
C) expectations that inflation will be higher in the future than it is now.
D) the greater liquidity of short-term notes as compared to long-term bonds.

Question

Quizplus · Accepted Answer

Market segmentation theory suggests that the yield curve's shape is influenced by the supply and demand for securities within each segment of the maturity spectrum, not by expectations of future interest rates. It posits that investors have specific maturity preferences, and typically, there is greater demand for short-term notes than for long-term bonds, which can contribute to the upward sloping shape of yield curves.

Market Segmentation Theory Explains the Typical Upward Sloping Shape of Yield