The market segmentation theory of the term structure is,essentially,the expectations theory with the addition of maturity risk premiums.

Question

Quizplus · Accepted Answer

The market segmentation theory and the expectations theory are distinct concepts. The market segmentation theory suggests that the bond market is segmented on the basis of maturity and that the interest rates for each segment are determined by the supply and demand for bonds within that segment. The expectations theory posits that the long-term interest rates are an average of current and future expected short-term interest rates, without explicitly accounting for maturity risk premiums.

The Market Segmentation Theory of the Term Structure Is,essentially,the Expectations