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Chapter 6 Outline

Chapter 6 Outline - Department of Economics So Chapter 6...

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Unformatted text preview: Department of Economics So 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 Please do not quote without proper citation. Department of Economics So [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 Please do not quote without proper citation. Department of Economics So [2] The Term Structure of Interest Rates - Basics • Bonds with identical risk, liquidity and tax characteristics may have different interest rates because the time remaining to maturity is different. • A plot of the yields on bonds with different terms to maturity but the same risk, liquidity and tax considerations is called a yield curve. • Yield curves can be classified as upward sloping (positive or normal), downward sloping (negative or inverse) or flat. [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. Department of Economics So [3] The Term Structure of Interest Rates - Facts • In addition to explaining why yield curves take on different shapes at different times, a good theory of the term structure of interest rates must explain the following three important stylized facts about the behavior of yield curves....
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Chapter 6 Outline - Department of Economics So Chapter 6...

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