The market segmentation theory proposes that:

Question

Quizplus · Accepted Answer

The market segmentation theory proposes that the debt market is divided into different segments, each with its supply and demand diagrams. These market segments represent different maturities or terms of debt, and the interest rates for each segment are determined independently of the others. Therefore, the correct option is C, which states that the debt market is represented by a series of supply/demand diagrams, each representing a different term, and these operate independently of one another. The other options are incorrect because they do not align with the market segmentation theory. Option A suggests that lenders prefer shorter-term loans, which would result in a downward sloping yield curve as short-term rates would be lower than long-term rates. Option B proposes that the debt market is represented by a single supply/demand diagram, which is inaccurate since there are various segments with different supply/demand relationships. Option D suggests that lenders prefer longer-term loans at lower rates, which is unlikely to occur in an efficient market.

The Market Segmentation Theory Proposes That