BU283 Lecture Notes - Lecture 2: Yield Curve, Credit Risk, Commercial Paper
Document Summary
Where principle outstanding = amount owning at time 0. Interest comes in 2 forms: blended payments, reinvestment. With amortized loans, lender only earns i% if can reinvest at i% Fixed income securities zero coupon bonds. Fixed income securities: a class of securities that pay a fixed income to the holder, the class includes bonds. Bonds: a debt security, like an iou, bond issuers borrow money from bond investors. Money market securities: short maturity, usually sold at a discount to fv (no coupons, examples, canadian treasury bills. Issued by gofc with min fv of : commercial paper. Issued by a highly rated private company: bankers" acceptance, company issues short term promise to repay principle. Zero coupon bonds: an estimate of the annual return an investor will earn. Determinants of the shape of the yield curve: real ir. Inflation: expectations, maturity preference, default risk, liquidity. The real rate of interest is 10% and expected inflation is 5%.
