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Investment Theory COMM 371 Lecture IV : Part IYield to Maturity and Term Structure of Interest RateDr. Farid Novin
Investment Theory, COMM 371, Dr. Farid Novin Lecture 4: part IOutline•Why Should Investors Pay Attention to the Yield Curve?•Theories of the Term Structure of Interest Rates•Expectations theory,•Liquidity preference theory•The market segmentation theory •The preferred habitat theory•The Expectations Theory and the Yield Curve•Deriving Spot Rates•Bond Valuation Using Zero-Coupon Bonds•No Arbitrage and The Law of One Price •Synthetic Replication of portfolio•Bootstrapping
Investment Theory, COMM 371, Dr. Farid Novin The term structure of interest rates•The term structure of interest rates measures the relationship among the yields on default-free securities that differ only in their terms to maturity. •This relationship between the terms of securities and their market rates of interest is known as the yield curve. •The yield curve displays the term structure of interest rates on securities at a particular point in time.
Investment Theory, COMM 371, Dr. Farid Novin Why Should Investors Pay Attention to the Yield Curve?
Investment Theory, COMM 371, Dr. Farid Novin Theories of the Term Structure of Interest Rates•By offering a complete schedule of interest rates across time, the term structure embodies the market's anticipation of future events . •An explanation of the term structure provides a way to extract this information and to predict how changes in the underlying variables will affect the yield curve.
Investment Theory, COMM 371, Dr. Farid Novin Theories of the Term Structure of Interest Rates•Economists have offered different theories about the determinants of the shape of the yield curve. I.Expectations theory,II.Liquidity preference theoryIII.The market segmentation theory IV.The preferred habitat theory