The Market Segmentation Theory of the Term Structure of Interest

question 8

Multiple Choice

The market segmentation theory of the term structure of interest rates

• A)assumes that investors will hold long-term maturity assets if there is a sufficient premium to compensate for the uncertainty of the long-term.
• B)assumes that the yield curve reflects the market's current expectations of future short-term interest rates.
• C)assumes that market rates are determined by supply and demand conditions within fairly distinct time or maturity buckets.
• D)fails to recognize that forward rates are not perfect predictors of future interest rates.
• E)assumes that both investors and borrowers are willing to shift from one maturity sector to another to take advantage of opportunities arising from changing yields.

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Definitions:

Present Value

The immediate valuation of a prospective sum of money or sequences of cash payments, utilizing a certain return rate.

Rate of Return

A calculation that determines the percentage gain or loss on an investment relative to the investment's cost.

Years

Units of time measuring the duration of 365 days (or 366 days in a leap year), commonly used to quantify time.

Effective Annual Rate

The interest rate on an investment or loan that considers the effect of compounding over a one-year period.