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Chapter 6 All Materials PDF

Chapter 6 All Materials PDF - ECON 330 Money and Banking...

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ECON 330: Money and Banking Fall 2007 Section 1: Tuesday and Thursday, 11:30AM-12:45PM, SMU 104 Section 2: Tuesday and Thursday, 5:00PM-6:15PM, SRO B Prof. J. Santos South Dakota State University Student Learning Objectives: Chapter 6: The Risk and Term Structure of Interest Rates [1] De°ne the term risk structure of interest rates . [2] Convention dictates that a risk premium consists of risk, liquidity and income tax premiums. De°ne each of the latter three premiums. [3] De°ne the term yield curve (or, term structure of interest rates). [4] Identify upward sloping (positive or normal), downward sloping (negative or inverse) and ±at yield curves. [5] State the three important facts about yield curves that a good theory of the term structure of interest rates must explain. [6] Name the three theories that economists have put forward to explain yield curve behavior. [7] Identify the basic assumption (about investor preferences for debt instruments) on which each theory is based. [8] Explain the basic argument of each theory. [9] Compute, according to the expectations and liquidity premium theories, the n th-period long-term rate given the path of expected future short-term rates. (For examples, see pages 138 and 142 of our textbook). [10] Identify the important facts about yield curve behavior that each theory can explain.
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Department of Economics South Dakota State University Chapter 6: The Risk and the Term Structure of Interest Rates Econ 330: Money and Banking Fall 2007 Prof. Joseph Santos This outline draws from Frederic Mishkin’s Money, Banking and Financial Markets (2007) and, as such, contains copy written material. Please do not quote without proper citation.
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Department of Economics South Dakota State University [1] The Risk Structure of Interest Rates Interest rates on different categories of bonds differ from one another at any given time. This is because of three so-called premiums Default risk premium Liquidity premium Income tax premium For example, municipal bonds are not taxed, whereas U.S. Treasurys are taxed. In the bond market, a risk premium sometimes refers to the sum of risk, liquidity and income tax premiums. [1] The Risk Structure of Interest Rates [2] The Term Structure of Interest Rates - Basics [3] The Term Structure of Interest Rates - Facts [4] The Term Structure of Interest Rates - Theories [5] The Expectations Theory – Part 1 [6] The Expectations Theory – Part 2 [7] The Expectations Theory – Part 3 [8] The Segmented Markets Theory [9] The Liquidity Premium Theory This outline draws from Frederic Mishkin’s Money, Banking and Financial Markets (2007) and, as such, contains copy written material. Please do not quote without proper citation.
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