Liquidity premium theory, unbiased expectations theory and market segmentation theory are theories to describe

Solution(By Examveda Team)

Liquidity premium theory, unbiased expectations theory and market segmentation theory are theories to describe term structure of interest rate. The liquidity premium theory states that bond investors prefer highly liquid, short-dated securities that can be sold quickly over long-dated ones. The theory also contends that investors are compensated for higher default risk and price risk from changes in interest rates. Unbiased Expectations Theory states that current long-term interest rates contain an implicit prediction of future short-term interest rates. Market segmentation theory is a theory that long and short-term interest rates are not related to each other. It also states that the prevailing interest rates for short, intermediate, and long-term bonds should be viewed separately like items in different markets for debt securities.