Which theory implies that interest rates are determined strictly by supply and demand for specific maturities?

The Market Segmentation Theory is the correct answer because it specifically posits that the interest rates for bonds of different maturities are influenced by supply and demand conditions in each maturity segment, rather than being determined by a unified interest rate across maturities. This theory suggests that investors have specific maturity preferences and that each segment of the yield curve functions independently. For example, some investors may prefer short-term investments due to their liquidity needs, while others might seek long-term bonds for stable income over an extended period.

As a result, interest rates can vary independently across different maturities, influenced solely by the levels of supply and demand within those segments. This contrasts with other theories that suggest a relationship among maturities, such as the Expectations Theory, which asserts that long-term rates reflect expected future short-term rates, or the Term Structure Theorem, which deals with the broader yield curve without focusing strictly on supply and demand dynamics. Therefore, the assertion of the Market Segmentation Theory accurately reflects the unique and segmented nature of interest rate determination across different maturities.