Canadian Securities Course (CSC) Level 1 Practice Exam

What is the difference between the expectations theory, the liquidity preference theory, and the market segmentation theory?

1. Expectations theory focuses on long-term rates predicting short-term rates; liquidity preference theory considers liquidity preferences; market segmentation theory looks at market volatility

2. Expectations theory relates to bond face value, liquidity preference theory to coupon rates, and market segmentation theory to maturity rates

3. Expectations theory predicts future rates, liquidity preference theory considers investor liquidity needs, and market segmentation theory assesses market fluctuations

4. Expectations theory connects long and short term rates, liquidity preference theory evaluates safety, and market segmentation theory addresses market distribution

The correct answer is: Expectations theory predicts future rates, liquidity preference theory considers investor liquidity needs, and market segmentation theory assesses market fluctuations

The correct answer is C. Expectations theory predicts future interest rates by analyzing current long-term and short-term rates and how they are related. Liquidity preference theory, on the other hand, focuses on investors' preferences for liquidity and how this impacts interest rates in the market. Market segmentation theory addresses the idea that different investors have specific preferences and needs, leading to market segments with different interest rates. Therefore, the key differentiator in this question is that expectations theory predicts future rates, liquidity preference theory considers investor liquidity needs, and market segmentation theory assesses different market segments based on investor preferences.