lecture 22 - Business Finance Lecture 22 Review of the...

Info icon This preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
116 Business Finance Lecture 22 Review of the Previous Lecture Different Type of bonds Government Bonds Zero Coupon Bonds Floating rate Bonds Other Types Inflation and Interest Rates The Fisher Effect Topics under Discussion Determinants of Term Structure Real Rate of Interest Expected inflation Interest Rate Risk Bond Yields and the Yield Curve Equity Markets and Stock Valuation Common Stock Valuation Term Structure of Interest Rates The relationship between short- and long-term Interest rates Tells us what nominal interest rates are on default free, pure discount bonds of all maturities These are pure interest rates because they involve no risk of default and a single, lump-sum future payment When long term rates are higher than short term rates we say term structure is upward sloping and vice versa. Determinants of Term Structure Real Rate of Interest Expected Inflation Interest Rate Risk Real Rate of Interest When real rate is high, all interest rates will tend to be higher and vice versa. Thus real rate does not really determine the shape of the term structure rather it influences the over all level of interest rates
Image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
117 Prospect for Future inflation It very strongly influences the shape of the term structure Value of dollar returns on investment for various periods of time may be eroded by future inflation So investors demand a compensations for this loss in the form of Inflation premium (higher interest rates) Expectation of a higher inflation rate will push long term interest rates higher than short term rates reflected by an upward term structure.
Image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern