CFA Level 1 Question of the Week: Yield Curve

Question

Thomas Gord, fixed income manager, is discussing the theories of the yield curve and their implications with his colleague. During their discussion, Thomas makes the following statements:
I:    “According to the pure expectations theory, rates at longer maturities depend only on expectations of future short-term rates.”
II:  “The liquidity preference theory of term structure states that longer term rates reflect investors’ expectations about future short-term rates as well as a liquidity premium”
III: “The market segmentation theory argues that lenders and borrowers have preferred maturity ranges and the shape of the yield curve is determined by the supply and demand for securities within each maturity range, independent of the yield in other maturity ranges.”
Which of the statements made by Thomas are most likely correct?Statement I and II onlyStatement II and III onlyAll three statements are correct

fabian · Answer

@exam_whiz‌ can you vote the right answer as well so that we will know whether we got the right one? :)

exam_whiz · Answer

Sure @fabian! The correct answer is C- all 3 statements are correct.