The market segmentation theory suggests that there are separate markets for short-term bonds, immediate term bonds and long-term bonds, because different investors have preferences for specific markets, so rates are determined by separate supply and demand markets for the interest rate in each respective market, with little substitution across markets.

Question

Quizplus · Accepted Answer

This is a correct statement. The market segmentation theory suggests that different investors have different preferences for specific markets, leading to separate supply and demand markets for each type of bond. As a result, rates are determined independently in each market, with little substitution across markets.

The Market Segmentation Theory Suggests That There Are Separate Markets