ECO301919 - 3 shapes “usually” the yield curve is...

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ECO 301 9/19/2011 municipal bonds - no federal income tax interest rate on Govt Bond: after tax interest rate= Igo (interest govt) * (1-t) imo=igo*(1-t) municipal bonds currently have higher interest rates than government bonds - flee to bonds cause them to drop, demand increase not also seen in municipal bonds rates move together
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Unformatted text preview: 3 shapes “usually” the yield curve is ascending Expectations theory on yield curve I2y= [i1y_i1y^e]/2 LT I is average of current and future ST If interest is equal over time period investor chooses ST bond Thus: i2y = [(i1y+i31y}/2]+h2 H2 is risk premium of position that can’t unwind halfway through...
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