Question of the Week – Fixed Income

The three major term
structure theories are summarized below from the perspective of an
upward-sloping yield curve:

Pure Expectations Theory – Future
interest rates are expected to rise.

Liquidity Preference Theory – Investors in long-term
securities demand a risk premium for tying their money up longer.

Market Segmentation Theory – There are separate markets
for long-term and short-term securities, and the long-term market demands
greater returns.