Which of the following is true of the market segmentation theory?
A)According to the market segmentation theory, the shape of the yield curve depends on investors' expectations about future inflation rates.
B)According to the market segmentation theory, the yield curve can only be upward sloping at any given time.
C)According to the market segmentation theory, lenders prefer to make short-term loans rather than long-term loans.
D)According to the market segmentation theory, the yield curve can only be flat at any given time.
E)According to the market segmentation theory, the slope of the yield curve depends on supply/demand conditions of a security in the long- and short-term markets.

Question

Quizplus · Accepted Answer

According to the market segmentation theory, the slope of the yield curve depends on supply/demand conditions of a security in the long- and short-term markets. This means that the shape of the yield curve can be flat, upward sloping, or downward sloping depending on the demand for long-term versus short-term securities. Therefore, option A and option B are incorrect. Option C is also incorrect as the market segmentation theory does not make any assumptions about lenders' preferences for short-term loans. Finally, option D is incorrect as it assumes that the yield curve can only be flat, which is not true according to the market segmentation theory.

Which of the Following Is True of the Market Segmentation