debt market notes part III (yield curve)

debt market notes part III (yield curve) - UNIVERSITY OF...

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UNIVERSITY OF ILLINOIS College of Business - Department of Finance Finance 300 (Financial Markets) Debt Investments Bonds are sometimes described as debt securities and sometimes as fixed-income investments. If you understand what each of these terms means, you understand how bonds work. When you buy a bond, you’re actually lending the issuer money that you expect to get back. That’s the debt. The issuer pays interest for the use of your money, typically on a set schedule. That’s the fixed income. People often think of bonds as a more conservative investment than stock. It is true that you can buy them at issue and hold them until maturity, so that what is happening to bond prices in the marketplace doesn’t affect you. But changing demand does affect the price, so you can also trade bonds to realize capital gains from selling for more than you paid to buy them. You can create a diversified portfolio by purchasing bonds of different terms, from different issuers, and with a range of ratings. Yield curve — or the relationship between the interest rates of short- and long-term bonds of equivalent investment quality — is a useful measurement to help you manage your fixed-income portfolio. Understanding Yield Curve A yield curve provides a snapshot of the relationship of long-term and short-term bond interest rates at a particular point in time. Historically, investment analysts and economists have also used yield curves to forecast the outlook for the securities markets and the economy in general. To create a yield curve, bonds of equivalent investment quality are plotted on a graph, with the horizontal (or x) axis representing the length to maturity, and the vertical (or y) axis representing interest rates. The most common yield curve compares the interest rates on U.S. Treasury debt securities with maturity dates ranging from one month to 30 years. A positive curve sloping upward to the right — also known as a normal yield curve — indicates that interest rates are higher as the maturities of equivalent bonds lengthen. Analysts have traditionally considered a positive curve a sign of a healthy and expanding economy. Positive Yield Curve
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This note was uploaded on 08/30/2009 for the course FIN 300 taught by Professor Jackson during the Spring '07 term at University of Illinois at Urbana–Champaign.

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debt market notes part III (yield curve) - UNIVERSITY OF...

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