CH09 - 9-1Chapter 9Term Structure of Interest...

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Unformatted text preview: 9-1Chapter 9Term Structure of Interest Rates9-2Business Cycle Patterns for the Term StructureYieldMaturityRisingDeclining9-3The most common yield curve shape is upward-sloping.Declining yield curves occur when interest rates are historically high.Short-term interest rates are more variable than long-term interest rates.Yield Curves9-4Historical evidence indicates two other empirical regularities of the term structure:For maturities of six months and less, the yield curve has an upward slope most of the time.The prices of long-term bonds are more variable than the prices of short-term bonds.9-5[ ][ ]yDurationPrice%=Short maturities:[Small][Large]Long maturities:[Huge][Small]The duration effect dominates for long maturities.9-6Each maturity is a separate market.There is no substitutability between maturities.This could explain any yield curve shape.Segmented Markets Theory9-7Increasing Liquidity PremiumRatesMaturityRisk Premium19-8Investors prefer the shortest maturity.Investors are risk averse.Longer-term bonds are riskier.Borrowers are ignored.Assumptions9-9What does it mean to be risk averse?Risk neutral: utility per dollar is constant....
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This note was uploaded on 06/07/2011 for the course FIN 4243 taught by Professor Dudley during the Spring '08 term at University of Florida.

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CH09 - 9-1Chapter 9Term Structure of Interest...

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