Determinants of Bond Yields

Determinants of Bond Yields - Chapter 7.7 Determinants of...

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Chapter 7.7: Determinants of Bond Yields The yield on any particular bond reflects a variety of factors, some common to all bonds some not Term structure of interest rates – the relationship between short-term and long-term interest rates o Tells us nominal interest rates on default-free, pure discount bonds of all maturities o Basically tells us what pure time value of money for different lengths of time is Upward sloping term structure – when long term rates are higher than short term rates o Downward is the opposite o Can also be “humped” (rates increase at first but begin to decline as we reach longer term) Most common shape of term structure is upward sloping (with varying steepness) What determines the shape of term structure? o The real rate of interest Compensation investors demand for forgoing the use of their money (pure time value of money after adjusting for inflation) When the real rate is high all interest rates will be higher and vice versa
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This note was uploaded on 12/06/2011 for the course FIN 3134 taught by Professor Ddklock during the Fall '08 term at Virginia Tech.

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Determinants of Bond Yields - Chapter 7.7 Determinants of...

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