Lesson Summary on Determination and Term Structure of Interest Rate - Chapter 6 The Structure of Interest Rates Chapter Outline The Term Structure of

Lesson Summary on Determination and Term Structure of Interest Rate

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Chapter 6: The Structure of Interest Rates Chapter Outline The Term Structure of Interest Rates ( Pg. 137-147) The Yield Curve (Pg. 137) Theories of the Term Structure of Interest Rates The Expectations Theory (Pg. 138-142) The Liquidity Premium Theory (Pg. 142-143) The Market Segmentation Theory (Pg. 143) The Preferred Habitat Theory (Pg. 143-144) Economic Implications of the Yield Curve (Pg. 140) The Yield Curve and the Business Cycle (Pg. 145-146) The Yield Curve and Financial Intermediaries (Pg. 146-147) The Risk Structure of Interest Rates (Pg. 148-156) Default Risk (Pg. 148-149) Default Risk and the Business Cycle (Pg. 149-150) Bond Ratings (Pg. 150-151) Taxes (Pg. 154-156) Marketability (Liquidity) (Pg. 157) Options on Bonds (Pg. 157-160) Call Option (Pg. 157-158) Call Premium Put Option (Pg. 158) Put Discount Conversion Option (Pg. 158-160) Conversion Discount Chapter Key Points 1. The structure of interest rates explains why many different interest rates exist in financial markets on any given day. Interest rates differ by maturity, default risk, tax treatment, liquidity, and because of options imbedded in bonds. 2. The term structure of interest rates is the relationship among interest rates on bonds (by the same issuer) of different maturities. The yield curve describes the relationship.
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