Suppose the interest rates on one-, five-, and ten-year u. s. treasury bonds are currently 3%, 6%, and 6%, respectively. investor a chooses to hold only one-year bonds, and investor b is indifferent with regard to holding five- and ten-year bonds. which theories best explain the behavior of investors a and b?

Investor A's preference can be defined by the segmented market theory whereas Investor B's preference can be described by the expectations theory .

Explanation:

What Is Market Segmentisation

Theory?

Market segmentation theory states that there are no relations between long and short term interest rates because they are invested separately.

It also state that interest rate for short, intermediate and long term bonds also shall be looked at of be viewed independently not in combination of each other

Investors are hesitant to shift to other bond investment so they stick to their current one in the fear of other maturity range being risky. So they will only have one year bond investment.

Expectations theory:

Expectations theory tries to make presumption estimate of what the future short te interest rate will be according to the observation of the current long term interest rate

In this theory investors tend to take on two concecutives bond investments in the same year and yield the same interest.

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