Question

1. Define the term of “twisting the yield curve”. How can it happen according to (1) the market segmentation theory and (2) the pure expectations theory?

Answer 1

Ans.

Twisting the yield curve – is an expression used to portray changes in running interest rates that change the shape/incline of the yield curve. For instance, a little increment in momentary rates and a huge increment in long-term rates that happen simultaneously.
According to the market segmentation theory Investors will be pulled in by a better return, borrowers by a lower cost. In this way the normal premium isn't really positive. In truth, its worth will rely upon the demand vs supply of bonds in the different market segments. For the developments favored by the issuers yet not by the investors, the premium will be there to attract the investors.. Then again, the premium will be negative for those market segments where the worth of the bonds that the issuers expect to supply vs what investors want to buy.
The pure expectation hypothesis holds that all bonds are perfect substitutes with the goal that their normal returns ought to be equivalent. Subsequently, there is no specific motivator, for banks or borrowers, to favor bonds with developments tantamount to those made arrangements for their speculation programs. The result is that the rates are controlled by expectations alone, and not influenced by the real accessibility on the market of bonds with different maturity period or value.