Chapter06 - Chapter 6 The Structure of Interest Rates...

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Chapter – 6 The Structure of Interest Rates
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Interest Rates Differences Factors that influence interest rate differences 1. Term to Maturity 2. Default risk 3. Tax treatment 4. Marketability 5. Call or Put Features 6. Convertibility
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1. Term Structure of Interest Rates Term structure of interest rates examine the relationship between yield and maturity of securities that differ ONLY in term to maturity at a point in time All other characteristics the same, usually drawn for U.S. Treasuries Yield Yield LT rate > ST rate LT rate < ST rate maturity maturity “Normal” Yield Curve Inverted Yield Curve
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Expectation Theory—shape of the yield curve is determined solely by expectations of future interest rate movements Changes in expectations —leads to changes in the shape of yield curve Assume investors have no maturity preferences – just searching for best yield relative to their expectations Long-term interest rates represent the geometric average of current and expected future (implied forward) interest rates
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Example: 2 year bond 5% yield 3 year bond 5.5% yield Desired investment period 3 years Two choices Buy a 3 year bond; OR Buy a 2 year bond and when it matures, buy a 1
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This note was uploaded on 03/24/2011 for the course FINA 409 taught by Professor John during the Spring '11 term at Ohio State.

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Chapter06 - Chapter 6 The Structure of Interest Rates...

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