Select the right answer 5. According to the market segmentation theory of Intere

Question

Select the right answer 5. According to the market segmentation theory of Interest rates, a. Investors prefer certain maturities and will not normally switch out of those maturities. b. Investors are indifferent between different maturities if the long-term rates are equal to the average of current and expected future short-term rates. c. Short-term rates will always be lower because they are riskier. d. Long-term rates are higher than the average of current and expected future short-term rates.

Explanation / Answer

Answer : option (a.) that is Investors prefer certsin maturities and will not normally switch out of those maturities.

The Market Segmentation theory of interest rates states that the Short term and long term markets are two different categories, and the yeild curve will take its shape depending upon the demand and supply of securotoes within these categories.

Most investors have set preference regarding the length of maturity they want to invest in, and the buyers and sellers of different maturities that is long term and short term can not be easily subsituted for each other .

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