FIN-2Lecture 9-The Term Structure of Interest Rates and Yield Derivation

It indicates the debt instruments that are being

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Unformatted text preview: yield curve for inflationindexed bonds such as the TIPS (Treasury Inflation- The Yield Curve Shapes § Normal Yield Curve - The normal yield curve is supposed to be a “positive yield curve” (upward sloping). § It indicates the debt instruments that are being compared are equal with regard to quality of credit. However, the debt instruments that have a longer term period produce better yields than the debt instruments that have a shorter term period. § The normal yield curve is termed so because of the fact that in case of greater risks the market anticipates an equally great amount of The Yield Curve Shapes § Flat Yield Curve - As far as a flat yield curve is concerned the yields of the debt instruments with short term periods and the yield of debt instruments with long term periods are almost the same. § The flat yield curve could be observed when there is a changeover between an inverted yield curve and a normal yield curve. The Yield Curve Shapes § Inverted Yield Curve - In the instance of an inverted yield curve, the yield of a debt instrument having a long term period has a lesser amount of yield compared to a debt instrument that has a same credit quality but comes with a shorter term period. § Steep Yield Curve - The steep yield curve is normally observed at periods in an economy immediately after recession or prior to economic enlargement Key terminology § To distinguish between yields on long-term bonds vs short-term rates that will be available in future, investors use the following terminologies: § Spot Rate – the rate that prevails today (YIELD) for a time period corresponding to the maturity of a Zero § Short Rate – interest rate for that interval available at different points in time § Forward rate - The expected yield on a given fixed-income security at a particular time in the Investors’ Bond Pricing § § § Earlier we discussed coupon bonds and Zero-coupon Bonds We also said that bonds with differ...
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