Answer: Segmented markets theory

## Explanation The segmented markets theory is best represented by both lender and borrower preferences influencing the yield curve shape. This theory suggests that different maturity segments operate independently, with supply and demand from both lenders (investors) and borrowers determining yields in each segment. **Comparison of theories:** - **Local expectations theory**: Based purely on expectations of future short-term rates - **Liquidity preference theory**: Primarily focuses on investor risk preferences and liquidity premiums - **Segmented markets theory**: Considers preferences of both lenders (supply side) and borrowers (demand side) across different maturity segments In segmented markets, lenders have preferred maturities for investment, and borrowers have preferred maturities for funding, and these preferences collectively determine the yield curve.

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