The Risk and Term Structure of Interest Rates - Term Structure of Interest Rates - Segmented Marktes Theory
3 important questions on The Risk and Term Structure of Interest Rates - Term Structure of Interest Rates - Segmented Marktes Theory
What is the segmented market theory?
Theory that sees markets for different-maturity bonds as completely separate and
segmented. The interest rate on a bond of a particular maturity is determined by the supply of and demand for that bond, and is not affected by expected returns on other bonds with other maturities
segmented. The interest rate on a bond of a particular maturity is determined by the supply of and demand for that bond, and is not affected by expected returns on other bonds with other maturities
What are the key assumptions of the segmented market theory?
That:
- Bonds of different maturities are not substitutes at all.
- Expected return from holding a bond of one maturity has no effect on the
demand for a bond of another maturity
Why are bonds of different maturities no substitutes?
Investors have preferences for bonds of one maturity over another.
• If investors generally prefer bonds with shorter maturities that have less interest-rate risk, then this explains why yield curves usually slope
upward (fact 3).
• If investors generally prefer bonds with shorter maturities that have less interest-rate risk, then this explains why yield curves usually slope
upward (fact 3).
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