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Explain the market segmentation theory of the term structure.

Explain the market segmentation theory of the term structure.

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Market segment theory states that market comprises of short term and long term interest securities. Each type of interest are distinctive in nature and divide the market into short term and long term. Individuals have their own preference for investments. Some invest in short term interest yielding bonds while others prefer long term yield. Therefore, the yield curve generally show upward trend as each market segment is determined by the forces of demand and supply with their own distinctive yielding characteristics.

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