Lecture 6

Lecture 6

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Unformatted text preview: m • D) No Short Term Interest Rates and inflation Long Term Interest Rates and Inflation Commodities D Migrating to As Oil Res is ting B Shutdown, Fed The TIPS yield curve Treasury Inflation Protected Securities (TIPS) 1 .0 0 0 .0 0 - 1 .0 0 5Y 10Y - 2 .0 0 30Y 20Y A d ve rtise me n t Tenor Coupon Pr ic e Las t 1 Month 1 Year Time 5 Year 0.1250 103- 06½ - 0.58% - 37 + 99 10/11/2013 10 Year 0.3750 99- 02½ 0.47% - 32 + 129 10/11/2013 20 Year 3.3750 139- 03 1.05% - 23 + 109 10/11/2013 30 Year 0.6250 81- 04¼ 1.41% - 14 + 104 10/11/2013 Change s hown in bas is points YTM on an old TIPS Bond Two views on risk of long and short term bonds • A) Long bonds are riskier than one year bonds because if you buy them now and sell in one year, you don’t know what price you will get when you sell • B) Borrowing with long bonds (at a fixed coupon rate) is safer than borrowing with one year bonds and rolling them over because you can lock in the interest rate you will pay over the long term. Impact of changes in yield on price of zero coupon bonds k Let yt be the YTM at date t of a zero-coupon bond that matures in k periods. Let F V be the bond’s face value pk = t FV k (1 + yt )k log(pk ) = log(F V ) t k k ⇥ log(1 + yt ) The higher the maturity k the bigger...
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This note was uploaded on 11/11/2013 for the course ECON 106F taught by Professor Atkeson during the Fall '05 term at UCLA.

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