You are a financial analyst for the CMC Corporation. This corporation predicts changes in the economy, such as interest rates, retail trends, and unemployment. Your job is to educate incoming analyst on the terminology, definitions, and uses of interest rate theories, yield curves, and predictions. In your next training session, you will cover major theories that have been developed to explain resulting yield curves and the term structure of interest rates. Prepare a training guide with the following:

1.Define and compare the following theories: expectations theory, liquidity theory, market segmentation theory, and preferred habitat hypothesis theory. Explain how each of the above theories explain changes in the economy.
Provide examples for each, and be sure to use and properly cite scholarly sources.

                                                             SAMPLE SOLUTION

This theory provides a clear suggestion that expectations within the bond markets have a close relation with forward rates exhibited in current long-term bonds. Most investors make final decisions basing on what they foresee in future levels of interest ratees where it portrays that long-term investors have an option of choosing to purchase debt instruments basing on their forward interest rates or not (Aurier, & Guintcheva, 2014). This depends on how favourable it is on the current rates of interest. Expectation theory therefore implies that permanent rate of increase in interest rates often lead to permanent increase in long rate level since the total weights often total to a constant single variable.

Liquidity Theory

Liquidity theory defines preferences to demand for money and deals with different variables on employment patterns, cash flows and determination of interest rate generated by cash supply and demand. Money demand is considered theoretical depending on amount of foregone interests through failure to uphold bonds which in this case refer to different stocks and less liquid assets inclusive of the government bonds (Foucault, 2013). Rates of interest cannot however be considered a reward in relation to savings due to savings hoardings in cash form since there will be no generation of interests to that amount of money. It still makes no difference even though that person has completely refrained from consuming his income currently. In this theory, money is considered liquid asset whereas liquidity is an attributed asset.