KIC000053 - The Term Structure of Interest Rates...

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The Term Structure of Interest Rates • Observation: Similar bonds with different maturities typically sell at different yields. • We may graphically summarize the relationship between yield and aturity for a group of similar bonds in a Y'f-L CUYV-t. The Term Spread Forward Rates • Under the expectations hypothesis, the market's expectation offuture short-term interest rates may be inferred from forward rates. • A forward rate is the inferred short-term rate for a future period that makes the expected total return of a long-term bond equal to that of rolling over short-term bonds. The Term Structure of Interest Rates • Rising • Inverted • Flat r..- _ • Hump-shaped ~~ Explaining The Term Structure of Interest Rates Expectations Hypotbesis: Theory that longer-term yields to maturity are determined solely by expectations of future short-term interest rates. Liquidity PreferenceJbeory: Theory that investors demand a risk premium 'on long-term bonds. Assumes that short-term
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This note was uploaded on 09/07/2011 for the course FINANCE 320 taught by Professor Sapp during the Fall '10 term at Iowa State.

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KIC000053 - The Term Structure of Interest Rates...

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