Question

What is the most important contrast between the segmented markets theory and the expectations theory

Select one:

a. The expectations theory does a better job of explaining why yield curves typically are upward-sloping.

b. The expectation theory states that investors view similar assets that differ only with respect to maturity as perfect substitutes.

c. The segmented markets theory does a better job of explaining why yields on instruments of different maturities tend to move together.

d. The segmented markets theory states that investors view similar assets that differ only with respect to maturity as perfect substitutes.

Answer 1

the most important contrast between the segmented markets theory and the expectations theory is:

The expectation theory states that investors view similar assets that differ only with respect to maturity as perfect substitutes.

The expectations theory says that the slope of the yield curve depends on the expected future path of short-term rates. The implication of the expectations theory is that expected returns for a holding period must be the same for bonds of different maturities. It is based on assumption that instruments with different maturities are perfect substitutes. Whereas The segmented markets theory explains upward-sloping yield curves as resulting from the demand for long-term bonds being low relative to the demand for short-term bonds.The segmented markets theory has difficulty explaining why yields on instruments of different maturities tend to move together.