2LectureTS

2LectureTS - yield curve Rising : Flat Declining 9...

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1 Term Structure Explaining TS Determinants of Interest Rate
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2 Definition of TS Relationship between the YTM on ZCB and time to maturity Uses Pricing bond, loan, mortgage… Forecasting interest rate, inflation, exchange rates, default rate. ..
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3 Plot of the TS Need ZCBs 0 1 0 1 2
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4 Plot the spot rates
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5 2. Explaining TS First, we need to explain the concept of forward rate Forward rate= an implicit rate for future periods 0 1 2 0 1 2
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6 Note Spot rate is a geometric mean of the forward rates
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7 Theory :Pure Expectation Theory If this theory holds ► LT rate = ST rate Buy + Hold 2-yr ZCB 0 1 2 Roll over 1-year ZCB 0 1 2
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8 This theory is consistent with any shape of the
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Unformatted text preview: yield curve Rising : Flat Declining 9 Liquidity Premium~ LT rate > Av ST rates iff 10 Applying Term Structure to Financial Institutions Estimating the cost of deposits assuming 25 bp/ year administrative markup Maturity Yield F-rate LP CD-rate 1 8%-2 8.25 0.5 3 9.5 1.0 Term structure 11 Applying Term Structure to Investments Time YTM-ZCB Bank rate (per year) 1 5 5% 2 7 8% 12 Applying Term Structure to Pricing Ex What is the price of 5% 2-year Bond YTM-ZCB 1 8% 2 10% 13 3.Determinants of Interest Rate 14 Yield on Security Corporate Bond = Govt Bond =...
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This note was uploaded on 02/28/2012 for the course FINE 442 taught by Professor Larbihammami during the Spring '12 term at McGill.

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2LectureTS - yield curve Rising : Flat Declining 9...

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