09_16_2010 Interpreting Bond Yields

09_16_2010 Interpreting Bond Yields - and demand for...

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1 NAME OF INITIATIVE OR GROUP FIXED INCOME SECURITIES Spring 2010 – FNCE 235/725 Prof. Stephan Dieckmann SEPTEMBER 16, 2010 INTERPRETING BOND YIELDS – ADDITIONAL MATERIAL
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2 Historical Term Structures
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3 Term Structure Theories • Try to answer the question: What determines the shape of the term structure? • Several forms of Expectation Theories: • General idea is that market participants incorporate their expectations about future short term rates. • One criterion by which expectation theories differ is whether market participants require a risk premium. Market Segmentation Theory: • The shape of the term structure is determined by the supply of
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Unformatted text preview: and demand for securities within each maturity sector. 4 Short Term Rates during 2008/2009 5 News 6 News 7 News 8 Historical Term Structures 9 Historical Term Structures 10 Two Risks Even without facing default risk, as often assumed in the context of government bonds issued by advanced economies, there are two risks that cause uncertainty about the holding period return over some investment horizon: Price Risk (uncertainty about the price of the bond at the end of the investment horizon) Reinvestment Risk (uncertainty about the rate at which proceeds can be reinvested)...
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09_16_2010 Interpreting Bond Yields - and demand for...

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