ACTSC 231 ch08-Actsc231

ACTSC 231 ch08-Actsc231 - Section 8.3 The term structure of...

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Unformatted text preview: Section 8.3. The term structure of interest rates ACTSC231 — Mathematics of Finance Department of Statistics and Actuarial Science University of Waterloo Fall 2010 Instructor: Chengguo Weng C. Weng ([email protected]) – p. 1/ 9 Motivation • In practice, the “interest rate" (return rate, or yield rate) varies, depending on the length of investment term. XBox Yield rate on US TB, and yield rate on Canada TB • A variety of theories to explain the variation: XBox expectation theory XBox liquidity preference theory XBox preferred habit theory • Expectation theory: XBox Pure expectation theory: assume investors are indifferent from a long-term investment and a sequence of short-term investments. XBox Shortfall of pure expectation theory: RHD in reality, people do not want to tie up money for a long period; they prefer to short-term investment, if the yield rate is the same for long-term and short-term investment....
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ACTSC 231 ch08-Actsc231 - Section 8.3 The term structure of...

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