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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 (c2weng@uwaterloo.ca) 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 longterm investment and a sequence of shortterm 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 shortterm investment, if the yield rate is the same for longterm and shortterm investment....
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This note was uploaded on 01/21/2011 for the course ACTSC 231 taught by Professor Chisholm during the Fall '09 term at Waterloo.
 Fall '09
 Chisholm

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