Understanding the Term Structure of Interest Rates Prepared for Fundamentals of Financial Management Distributed October 24, 2005 TABLE OF CONTENTS List of Figures....................... ....................................... .....................iii List of Abbreviations and Symbols............................. ..........................iv Summary.............................................
understand the term structure of interest rates, we study the yield curve. Yield curves are normally upward sloping reflecting a positive relationship between terms to maturity and yield to maturity, or they can be downward sloping (inverted), or flat. Yield curves may however also depict complicated shapes. An upward sloping yield shows that long term interest rates are higher than short term interest rates. This is due to long term bonds having to compensate for the interest rate risk and inflation
Introduction 2 2. Method 2 3. Data 3 4. Results 4 5. Limitations 5 6. Suggested improvements 5 7. References 7 Introduction The term structure of interest rates describes the empirical relationship between the yields on fixed income securities and their term to maturity (Poitras, 2005). The yield curve is the term structure’s graphical representation, plotting the yields of fixed income securities as a “function of their maturity” (Stander 2005, Cochrane, 2005). Yield
6.1 Risk Structure of Interest Rates 1) The risk structure of interest rates is A) the structure of how interest rates move over time. B) the relationship among interest rates of different bonds with the same maturity. C) the relationship among the term to maturity of different bonds. D) the relationship among interest rates on bonds with different maturities. 2) The risk that interest payments will not be made, or that the face value of a bond is
Ownership Structure Besides deciding whether to purchase a new or established property, buyers also need to decide on the ownership structure of their property. As we are all unique individuals, there are different ownership structures that can be beneficial for different people. The structure you choose will be dependent on your own individual circumstances. The most common ownership structures include the following: Individual Ownership, as the name implies, means that the property is owned by
Question 1 Are interest rate changes predictable? Interest rates are not entirely predictable but can be inferred from present interest rate prices. For example, when current interest rates are exceptionally low, future interest rates can be expected to rise and vice versa. Question 2 Consider a two year coupon bond which pays an annual coupon of 5% with a principal value of $100. Using the zero coupon bonds B(0, 1) and B(0, 2): 1. What is the strategy to replicate the coupon bond? 2. What
Endogenous Money: Implications for the Money Supply Process, Interest Rates, and Macroeconomics Abstract Endogenous money represents a mainstay of Post Keynesian (PK) macroeconomics. PK theory challenged monetarism’s description of the money supply process. The focus of PK endogenous money theory is the mechanics of the money supply process. PK theory is itself divided between “horizontalist” and “structuralist” approaches to the money supply. Horizontalists believe the behavior of financial institutions
It is important to create a context when looking at funding structure as each industry has different debt to equity ratio benchmarks, as some industries tend to use more debt financing than others. A debt ratio of .5 means that there are half as many liabilities than there is equity. In other words, the assets of the company are funded 2-to-1 by investors to creditors. This means that investors own 66.6 cents of every dollar of company assets while creditors only own 33.3 cents on the dollar.A debt
securities trading and making markets in which securities are traded. E. Finance Companies – make loans to both individuals and businesses. Unlike depository institution, finance companies do not accept deposits. But instead they rely on short term and long term debt for funding and many of their loans are collateralized with some kind of durable goods, like washer/dryer, furniture, and things along that line. F. Mutual Funds – pool many individuals and companies financial resources and invest those
// EBIT (x-axis) crossover point of the following two capital structure plans. Complete the table and Draw the graph and show all the points including crossover, where line crosses y-axis, and the three EBITs below 30pts Assets = $3,000,000 Stock Price = $20 Interest Expense = 12% PLAN I D/E = 1.1 Recession Expected Expansion EBIT $500,000 $1,000,000 $1,500,000 Interest Expense __________ _________ __________ Net Income __________