Canadian Securities Course (CSC) Practice Exam

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What does the Market segmentation theory suggest influences the yield curve?

  1. Central banks

  2. Supply and demand for bonds

  3. Liquidity preference of investors

  4. Equity market fluctuations

The correct answer is: Supply and demand for bonds

The Market segmentation theory suggests that the yield curve is heavily influenced by the supply and demand for bonds. This theory argues that interest rates are not based on the overall market, but rather on the specific supply and demand for bonds of different maturities. Therefore, central banks (A) and equity market fluctuations (D) would not be seen as major factors in determining the shape of the yield curve, as they do not directly affect the demand for bonds. Additionally, while the liquidity preference of investors (C) may influence individual bond choices, it would not have as significant of an impact as the overall supply and demand for bonds.

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