The segmented markets theory for explaining the term structure of interest rates assumes that:
A) bond prices and yields are positively related.
B) the yield curve is upward-sloping.
C) the yield curve is flat.
D) securities in different maturity ranges are not alternatives for one another.

Question

Quizplus · Accepted Answer

The segmented markets theory assumes that securities in different maturity ranges are not alternatives for one another. This means that investors and borrowers are restricted to their particular segment of the market and do not consider securities with different maturities as substitutes. This leads to the formation of different interest rates for different maturities and can result in a flat or even inverted yield curve. Bond prices and yields may be positively or negatively related depending on market conditions and the specific characteristics of the bonds. The theory does not assume a particular shape for the yield curve, but it does suggest that it may be different from the typical upward-sloping curve that results from the expectations theory.

The Segmented Markets Theory for Explaining the Term Structure of Interest