If inflation increases, interest rates will increase as lenders will simply pass on the extra loss of the purchasing power of money to borrowers.

A is incorrect: The interest rates on U.S. Treasury securities feature an embedded maturity premium primarily due to the fact that the probability of default is higher on long-term bonds than on short-term goals. The maturity premium is more for long term bonds than short term bonds.

C is incorrect: The market segmentation theory states that the bond market is segmented into different maturity sectors. As such, the prevailing interest rates for short, intermediate, and long-term bonds should be viewed separately and are akin to items in different bond markets. It propagates the idea that the return offered by a bond with a specific term structure is solely a function of the supply and demand for that bond and is independent of the return offered by bonds with different term structures.

D is incorrect: According to the liquidity preference theory, all other things being equal, investors prefer liquid investments to illiquid ones. And that's because investors prefer cash, and barring that, an investment that's as close to cash as possible. To hold a longer-term loan, investors will demand a liquidity premium which will be built into the interest rate demanded.