Chap 5 Notes - Cost of Money IR

Chap 5 Notes - Cost of Money IR - Chapter 5: Cost of Money...

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Chapter 5: Cost of Money (Interest Rates) Recommended Questions: a. You are expected to solve every question behind the chapter 4. b. However, the following questions are recommended: For computational problems #5-3, 7 , 8, 9 on p.2I3 and 214. For conceptual questions, refer to the "remember the followings" on the last page of this handout. The following topics for chapter 5 witl be covered: (1) How interest rate levels are determined (2) Determinants of interest rates (3) Term structure of interest rates (4) Three theories that explain the shape of the yield curve (This handout do not provide the materials for the three theories. Refer to your text.) (5) Forecasting future interest rates and inflation rates.
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1. Determination of interest rate levels
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2. Determinants of interest rates 4
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3. Term Strucfure of Interest Rates The term structure of interest rates is the relationship between interest rates and maturities of bonds. Yield curve: a graph that shows the term structure of Interest rates. You can hnd T-bonds' interest rates in the Wall Street Journal. Mark the each interest rate for different maturities and then link those points. That is a yield curve. Consider only T-bonds (DR) = LP = 0). Then e r* + IP + MRP 6
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Suppose the Wall Street Journal shows the following yields on Treasury bonds (T-bonds). Maturity yield (interest rate) 1 Year 5 7o 2Yeat 6 Vo 3 Year 7 7o (where yieid is yield to maturity of treasury bonds which is the rate of return on the treasury bonds if they were held till their maturities.) Draw a yield curve of the T-bonds. Suppose a
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Chap 5 Notes - Cost of Money IR - Chapter 5: Cost of Money...

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