ECN 481 (5), The Yield Curve

ECN 481 (5), The Yield Curve - The Yield Curve Yield...

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The Yield Curve Yield Curve (Term Structure of Interest Rates): A plot of the interest rates of Treasury Bills and Treasury Bonds versus their maturities at a point in time.
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Yield Curve: An Example Term (years) Interest Rate (%) 0.25 3.62 2.00 4.34 5.00 5.07 10.00 5.54 30.00 5.86
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The Slope of the Yield Curve Upward Sloping (term i ) -- usual case. Downward Sloping or Inverted Yield Curve (term i ) -- occurs periodically What information can we get from the yield curve?
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Observed Phenomena -- Yield Curve The downward sloping (inverted) yield curve is unusual but not rare. Interest rates of bonds of all maturities move together (are positively correlated) The downward sloping (inverted) yield curve tends to occur when interest rates in general are high.
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Theories (Hypotheses) Which Explain Yield Curve Behavior Key difference in assumptions : How close of substitutes are bonds of different maturities? We will assess each hypothesis how well does it predict the three observed phenomena?
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The Expectations Hypothesis -- The interest rate on a long-term bond will be equal to the average of short-term rates expected to
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ECN 481 (5), The Yield Curve - The Yield Curve Yield...

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