Question

Suppose the interest rates on one-, five-, and ten-year US Treasury bonds are currently 3%, 6%, and 6%. respectively. Investor A chooses to hold only one-year bonds and investor B is inerrant with grad to holding five- and ten-year bonds. Which theories best explain the behavior of Investors A and B?

A. Both Investors A and B exhibit preferences that are consistent with expectations theory.
B. Investor A's preferences are best explained by the liquidity premium theory, while Investor B's preferences are more consistent with the segmented markets Theory
C. Investor A's preferences are best explained by the segmented markets theory, while Investor B's preferences are more consistent with the expectations theory.
D. Both Investors A and B exhibit preferences that are consistent with the segmented markets theory.

Answer 1

C. Investor​ A's preferences are best explained by the segmented markets​ theory, while Investor​ B's preferences are more consistent with the expectations theory.

Step-by-step explanation:

Segmented market theory states that long and short-term interest rates are not related to each other.

Expectations theory talks about what short-term interest rates will be in the future based on current long-term interest rates.