What is the most important contrast between the expectations theory and the segmented markets theory?
A) The segmented markets theory states that investors view similar instruments that differ only with respect to maturity as perfect substitutes.
B) The expectations theory states that investors view similar instruments that differ only with respect to maturity as perfect substitutes.
C) The expectations theory does a better job of explaining why yield curves are usually upward-sloping.
D) The segmented markets theory does a better job of explaining why the yields on bonds of different maturities tend to move together.

Question

Quizplus · Accepted Answer

The expectations theory posits that investors view bonds of different maturities as perfect substitutes, basing their choices on their expectations of future interest rates, which contrasts with the segmented markets theory that suggests investors have specific maturity preferences and do not view bonds of different maturities as perfect substitutes.

What Is the Most Important Contrast Between the Expectations Theory