(Question)
"The Treasury spot rate curve currently has a similar shape of to the yield curve on Treasury coupon securities, which according to the market segmentation theory of interest rate term structure, indicates a relatively high level of demand from investors for intermediate term structures. Overzealous trading by investors unwilling to move into other maturity ranges may create mispricing and opportunities for arbitrage."
Is this statement correct?
Answer: No. It's incorrect.
The market segmentation theory says that the term structure of interest rates is determined solely by the supply/demand for a given maturity sector. The statement is incorrect because high demand from investors (who wish to lend money) would push interest rates lower, not higher, as observed in the term structure.
Friday, March 4, 2011
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