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5.1.BKM Ch 15
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Yield curve
Plot of yields on various bonds against the time to maturity
Pure yield curve
: yields on zero-coupon bonds. Use interpolation for large maturities
On-the-run yield curve
: use yields of coupon bonds. Relies primarily on the most recently issued treasury bonds
Short, Spot, and Forward rates
Short rate
: interest rate for a specified time interval =
r
i
Spot rate
: yield today on a zero coupon bond w/ specified maturity
Forward rate
: future short rate
Term structure
Relationship between various spot rates
Expectation hypothesis
What investors care about is their expected yield from various investments:
E(r
i
) = f
i
Liquidity Preference theory
Term structure merely reflects whether there exists more long term or short term investors
Segmentation theory
Different borrowers & lenders have different preferences for short, medium, or long-term investment
How to lock-in a forward rate
Buy short term zero coupon bond (receive X)
Sell long term zero coupon bond (repay X + forward)
Author
Exam9
ID
67437
Card Set
5.1.BKM Ch 15
Description
BKM
Updated
2011-02-19T16:41:56Z
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