CH3 - Bus 171A CH3 Why do we invest? Instead of keeping the...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Bus 171A CH3 Why do we invest? Instead of keeping the money under the mattress. Security!!! Not to make profit. ----------------------------------------------------------------------------------------------- Expectation hypothesis (Unbiased) 1. Buy a 2 year bond with interest reinvested at rate R2 2. Buy a 1 year bond with interest rate of R1, and reinvest interest, buy a second bond in year 2 at expected rate of 2r1 2r1 – expected prevail next year (forecast) If the demand for the Alt 2 rises, the government will raise the rate of the Alt 1 and lower the rate of the first year of Alt 2. Zero Coupon bond – bond which does not pay interest – only principal(face value) at maturity R1, R2 : Spot Rates 2r1 : Forward (expected interest rates) Long term rate is average rate of all the short term rate. 1. Long Term rates are some sort of averages of short term rates 2. Long term rates are less volatile than short term rates ------------------------------ 3. All rates have declined in the past 25 years
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 3

CH3 - Bus 171A CH3 Why do we invest? Instead of keeping the...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online