Term Structure of Interest Rates

Term Structure of Interest Rates - Term Structure of...

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Term Structure of Interest Rates From Last Time When a flight to quality occurs with people shifting out of risky bonds into low risk bonds, the savings curve in the risky bonds market does shift to the left while the savings curve in the low risk market shifts to the right. People invest in junk bonds because they offer a higher interest rate as compensation for the additional default risk. Liquidity, the ease with which an asset can be converted into cash, is a desirable characteristic of an asset. Liquidity reduces the risks of holding an asset: I can sell it quickly if I need to. So, illiquid assets must offer a higher return to induce people to hold them. Yield Curve The term structure of interest rates is the variation in yield for related debt instruments differing in maturity. It looks at bonds with common default risk, liquidity, information costs, and taxation characteristics but with different maturities. The yield curve shows the relationship at any one instant between the yield to maturity and term to maturity on otherwise comparable bonds. yield curve generally slopes upward: long-term interest rates are usually higher than short-term rates yield curve typically shifts up or down rather than twisting: long and short-term interest rates generally move up and down
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Term Structure of Interest Rates - Term Structure of...

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