Which interest rate theory states that investors prefer a certain maturity?

A. Liquidity preference.
B. Expectations hypothesis.
C. Market segmentation.

Correct Answer: C

Market segmentation: a theory related to the term structure of interest rates that focuses on the demand side of the market. There are several large institutional participants in the bond market, each with its own maturity preferences. Banks tend to prefer short-term liquid securities to match the nature of their deposits, whereas life insurance companies prefer long-term bonds to match their long-run obligations. The behavior of these two institutions and of savings and loans often creates pressure on short-term or long-term rates but very little on the intermediate market of five- to seven-year maturities. This theory helps to focus on the accumulation or liquidation of securities by institutions during the different phases of the business cycle and the resultant impact on the yield curve.