Answer: yields are determined entirely by the supply and demand for funds of a particular maturity.

## Explanation The segmented markets theory assumes that yields for each maturity segment are determined independently by the supply and demand for funds in that specific maturity segment. This theory suggests that investors and borrowers are restricted to specific maturity segments and do not substitute between different maturities, unlike the preferred habitat theory which allows for some flexibility in maturity preferences. **Key differences:** - **Segmented markets theory**: Complete segmentation, no substitution between maturities - **Preferred habitat theory**: Strong preferences but some flexibility to move between maturities for adequate compensation - **Option A** describes preferred habitat theory - **Option B** describes liquidity preference theory - **Option C** correctly describes segmented markets theory

Author: LeetQuiz Editorial Team