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15.3 - substantially from the yield-to-maturity Coupons may...

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BONDS PART 3 INTEREST RATES STRIPPED COUPONS REAL RETURN BONDS
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Term Structure of Interest Rates Term structure is the relationship between time to maturity and yields, all else equal It is important to recognize that we pull out the effect of default risk, different coupons, etc. Yield curve – graphical representation of the term structure Normal – upward-sloping, long-term yields are higher than short-term yields Inverted – downward-sloping, long-term yields are lower than short-term yields
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Figure 7.4 – Upward-Sloping Yield Curve
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Figure 7.4 – Downward-Sloping Yield Curve
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Government of Canada Yield Curve November 29, 2002
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Floating Rate Bonds Coupon rate floats depending on some index value There is less price risk with floating rate bonds The coupon floats, so it is less likely to differ
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Unformatted text preview: substantially from the yield-to-maturity Coupons may have a “collar” – the rate cannot go above a specified “ceiling” or below a specified “floor” Stripped or Zero-Coupon Bonds Make no periodic interest payments (coupon rate = 0%) The entire yield-to-maturity comes from the difference between the purchase price and the par value Cannot sell for more than par value Sometimes called zeroes, or deep discount bonds Bondholder must pay taxes on accrued interest every year, even though no interest is received Real Return Bonds Pays a Coupon rate plus an adjustment for inflation Ideal for situations where interest rates are expected to increase due to inflation Very popular with pension funds...
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