The market segmentation theory states that Treasury securities are divided into market segments by the various financial institutions investing in the market The changing needs, desires, and strategies of these investors tend to strongly influence the nature and relationship of short-and long-term rates The expectations hypothesis maintains that the yields on long-term securities are a function of short-term rates. The result of the hypothesis is that when long-term rates are much higher than short-term rates, the market is saying that is expects short-term rates to rise. Conversely, when long-term rates are lower than short-term rates, the market is expecting short-term rates to fall 6-10 Since the middle 1960s, corporate liquidity has been declining. What reasons can you give for this trend? The decrease is liquid ity can be traced in part to more efficient inventory management such as just-in-time inventory and point of sales terminals that provide better inventory control. The decline in working capital can also be attributed to electronic cash flow transfer systems, and the ability to sell accounts receivables through securitization of assets(this is more fully explained in the next chapter ) It might also be that management is simply willing to take more liguid ity risk as interest rates declined -213 CopyrightC2005 by The McGraw-Hill Companies, IncCopyright © 2005 by The McGraw-Hill Companies, Inc. S-213 The market segmentation theory states that Treasury securities are divided into market segments by the various financial institutions investing in the market. The changing needs, desires, and strategies of these investors tend to strongly influence the nature and relationship of short- and long-term rates. The expectations hypothesis maintains that the yields on long-term securities are a function of short-term rates. The result of the hypothesis is that when long-term rates are much higher than short-term rates, the market is saying that is expects short-term rates to rise. Conversely, when long-term rates are lower than short-term rates, the market is expecting short-term rates to fall. 6-10. Since the middle 1960s, corporate liquidity has been declining. What reasons can you give for this trend? The decrease is liquidity can be traced in part to more efficient inventory management such as just-in-time inventory and point of sales terminals that provide better inventory control. The decline in working capital can also be attributed to electronic cash flow transfer systems, and the ability to sell accounts receivables through securitization of assets (this is more fully explained in the next chapter). It might also be that management is simply willing to take more liquidity risk as interest rates declined