FinancialMarketsChap12

FinancialMarketsChap12 - Michael Yu Key Terms and Points...

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Michael Yu Key Terms and Points Chapter 12 Terms: Bootstrapping – A methodology used to construct the theoretical spot rate curve from the yield curve Forward rate – The rate on an investment beginning at some future data and for some specific length of time. Since it is derived from the yield curve, it is called an implicit forward rate Liquidity theory of the term structure – A theory that says implicit forward rates will not be an unbiased estimate of the market’s expectations of future interest rates because they embody a liquidity premium Market segmentation theory – A theory that recognizes that investors have preferred habitats dictated by savings and investment flows and that interest rate at any maturity is totally unrelated to expectations of future rates because people have absolute preferences, which cannot be overcome by higher rates Preferred habitat theory –Theory that the term structure reflects expected future rates and a risk premium that depends on the supply-demand situation in maturity sectors and that must be
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This note was uploaded on 01/27/2010 for the course ECON 252 taught by Professor Robertshiller during the Spring '08 term at Yale.

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FinancialMarketsChap12 - Michael Yu Key Terms and Points...

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