FIN 4313 Chapter Notes - Chapter 6: Yield Curve, United States Treasury Security, Credit Risk
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Term-to-maturity on the horizontal axis and interest rate percent on the vertical axis. The expectation theory: expectation theory- holds that the shape of the yield curve is determined by the i(cid:374)(cid:448)esto(cid:396)s" e(cid:454)pe(cid:272)tatio(cid:374)s of futu(cid:396)e i(cid:374)te(cid:396)est (cid:396)ate (cid:373)o(cid:448)e(cid:373)e(cid:374)ts a(cid:374)d that (cid:272)ha(cid:374)ges i(cid:374) these expectations change the shape of the yield curve. Assumes that investors are profit maximizers and that there is no risk difference between holding a long-term security and holding a series of short-term securities that are rolled over to their investment horizon (risk neutral) Investors are indifferent about purchasing long-term or short-term securities. R = the observed (spot or actual) market interest rate. Using the term structure formula to calculate implied forward rates: (cid:1858)(cid:1856) (cid:1857)= [(cid:4666)1+(cid:4667)/(cid:4666)1+ (cid:2869)(cid:4667) (cid:2869)] 1. Market-segmentation and preferred-habitat theories: market-segmentation theory- maintains that market participants have strong preferences for securities of a particular maturity and that they buy and sell securities consistent with these maturity preferences.