9-24-09 - 4 Short term rates tend to be more volatile than...

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171A 9/24/2009 CH5 Risk Structure – Risk Premium - Identical in every respect, every risk - Riskier bonds have higher YTM Term Structure - Identical in every respect except maturity - Longer term to maturity may or may not have higher YTM Yield curve - Look at YTM on bond identical, except maturity - Applies to US Treasuries Observation: (Fig 5.4, P108) 1. Rates on bonds of different maturities tend to move together 2. When short term rates are low, yield curve tends to be upward sloping When short term rates are high, yield curve tends to be downward sloping 3. Yield curves most often upward sloping
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Unformatted text preview: 4. Short term rates tend to be more volatile than long term rates (Fig. 1.1 P 5) 1. Expectations Model (1, 2, 4) All bonds are perfect substitute 2. Market Segmentation model (3) No substitutions at all 3. Liquidity premium model (1, 2, 3, 4) You want to invest $100 for 2 years Alternative 1: 2 yr CD at 8% per year, no withdrawal for 2 yrs Alternative 2: 1 yr CD at 7%, purchase another CD with proceeds from the 1 st CD at 9% per yr A1: $100(1.08) (1.08) $116.64 A2: $100(1.07) = $107 $107(1.09) = $116.63...
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This note was uploaded on 09/08/2010 for the course BUS 171A at San Jose State.

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