4500.15 - Topic 5: Topic 5: Term structure of structure of...

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Topic 5 Term structure of Topic 5: Term structure of interest rates and international arbitrage Purpose: This lecture covers the yield curve, with international scope The DCF approach in general form: Given an efficient Given an efficient market, NPV is zero for a securities transaction • Therefore, today’s price equals PV of all expected future cash NPV  P 0 + C i 1 R  i i 1 n 0 P 0 = C i 1 R i i 1 n flows
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The DCF approach to coupon bonds: Computing price with Computing price, with a known required rate of return: • Computing yield-to- maturity – equals the rate implied by the Market Price = Face Value 1+ R  n Coupon Pmt 1 R i i 1 n implied by the market price – search by trial- and-error Risk factors for bondholders: Purchasing power risk • Purchasing power risk • Interest rate risk • Reinvestment risk • Default risk
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The yield curve: R = r + inflation adjustment + risk adjustment R r + inflation adjustment + risk adjustment.
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This note was uploaded on 04/15/2011 for the course FINA 4500 taught by Professor Staff during the Spring '08 term at North Texas.

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4500.15 - Topic 5: Topic 5: Term structure of structure of...

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