Unformatted text preview: c. Tax-exempt bond yield = (taxable bond yield) x (1- tax rate) d. The higher the tax rate, the wider the gap between the yields on taxable and tax-exempt bonds III. The Term Structure of Interest Rates a. Interest rates of different maturities tend to move together b. Yields on short-term bonds are more volatile than yield on long-term bonds c. Long-term yields tend to be much higher than short-term yields d. The Expectations Hypothesis • Bonds of different maturities are perfect substitutes for each other • Current two-year interest rate should equal the average of 5 percent and the one-year interest rate one year in the future • When interest rates are expected to rise in the future, long-term interest rates will be higher than short-term interest rates e. The Liquidity Premium Theory •...
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This note was uploaded on 05/10/2010 for the course ECO 3223 taught by Professor Staff during the Spring '08 term at University of Central Florida.
- Spring '08
- Interest Rates