IAI Actuarial Core Principles · Business Economics · Role of money and interest rates in the economy
According to the market segmentation theory, what determines the yield at a particular maturity?
Under market segmentation theory, yields at each maturity are determined by supply and demand within that maturity segment, because investors and borrowers have preferred maturity ranges and do not readily substitute across them.
- AThe average of expected future short-term rates only
- BSupply and demand conditions specific to that maturity, because investors and borrowers have preferred maturity rangesCorrect
- CA fixed term premium that rises with maturity
- DThe central bank's policy rate alone
- The inflation rate in the most recent quarter
Explanation
Market segmentation holds that investors such as insurers and banks stick to preferred maturities, so each segment has its own supply and demand and yields are set independently. Averaging expected short rates describes the pure expectations theory.
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