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.............................................
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
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
An interest rate is the percentage of a loan that must be paid on top of whatever the loan was. For instance, if you borrowed four thousand dollars from the bank and they said that you have a 5% interest rate, this means that you will have to pay a total of four thousand, two hundred dollars. Interest rates on credits and securities give a fundamental synopsis of their attractiveness to banks. The premium rates in assigning supports crosswise over budgetary markets is very much alike to the costs
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
Liquidity Premium Theory The liquidity premium theory accepts the expectations approach that expectations of changes in interest rates affect the term structure of interest rates. But, it maintains that the expectations are not only factor influencing the term structure; liquidity factor also explains part of this structure. If the expectation theory is correct, then there are equal chances of having yield curves sloping upward to the right on more occasions than they slope downward to the right
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
company calculate the long term debt-equity ratio for the prior two years. Why would these companies use such different capitals structures? 2. Look up a company and download the annual income statements. For the most recent year, calculate the average tax rate and EBIT, and find the total interest expense. From the annual balance sheets calculate the total long-term debts (including the portion due within one year). Using the interest expense and total long term debts, calculate the average