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:

Principal-Agent Problem

A dilemma in which one party (the agent) may not act in the best interest of another party (the principal) who has delegated some decision-making authority to the agent.

Political Process

The set of activities involved in the acquisition and exercise of power within a governmental or organizational setting.

Voters' Interest

The concerns or benefits that motivate individuals to participate in political activities, including voting.

Government Failure

Inefficiencies in resource allocation caused by problems in the operation of the public sector (government). Specific examples include the principal-agent problem, the special-interest effect, the collective-action problem, rent seeking, and political corruption.