ch6.docx - I=ir expected interest rate risk premium Ir...

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I=ir + expected interest rate + risk premium Ir + expected interest rate + risk-free interest rate (treasury bills) RP=risk premium dependent upon default risk premium, liquidity premium, maturity risk premium (interest rate risk to the price of the bond) 30-year bond Pb= 1000/(1+i)^30 1 month bill Pb= 1000/(1-i)^(1/12) Risks for bonds: Liquidity premium Default Risk Premium Maturity Risk Premium US T-bond small chance none not small chance US Corp Bond not small chance not small chance not small chance US T Bill none none none
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Unformatted text preview: Term structure of interest rates: Bonds with identical risk, liquidity, and tax rates may have different interest rates because of the time to maturity. Segmented Market Theory- markets for different maturity of bonds are segmented by institutional factors. Institutional factors include: government regulation Expectations Theory (pure)- the interest rates on a long-term bond will equal an average of short-term rates that people expect to occur over the life of the bond Liquidity Premium Theory (modern)-...
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