Lecture 4 Flashcards
(12 cards)
What relationship does the yield curve show
Relationship between yield to maturity and maturity
Explain what the yield curve is
Describes the relationship between spot rates (YTM) with different maturities at a specifc point in time
What do the different slops of a yield curve indicate
Upward slopping - Long term rate > short term rates
Downward slopping - Short term rates > long term rates. Could indicate economic recession
Flat- Short term rate = Long term rates
Will riskier bonds have a higher or lower YTM
higher
What is spread in terms of yield spread
Different between ytm on a 10 year BBB corporate bond and a 10 year goverment bond. Represents a defaulr risk preemium investrs demond for investing in more risky securities
Will spread increase or narrow during economic expansion (confidence)
Narrow
Liquidity Preference theory and what type of investors invest
Long term bodns are more risky and therefore investors musb be paid a liquidity premium to hold less liquid long term debt
Forward rates contan a liquidity premium
Risk adverse investors
Explain Expectation theory and what type of investors are they
Long term spot intrest rate is teh average of expected future short term intrest rates
Long term and short term secruties are perfect subsitues
Risk newtral investors
Market Segmentation theory
Distinct markets exsit for different securities with different maturities
What is the concept of duration
Meausre of bonds lifetime that accounts for the entrie pattern of the cash flows over the life of the bond
- David Hoffman purchases a $1,000 20-year bond with an 8% coupon rate (annual payments). Yields on comparable bonds are 10%. David expects that, two years from now, yields on comparable bonds will have declined to 9%. Find his expected yield, assuming the bond is sold in two years.
14.29%
