ECO 2143 Lecture Notes - Lecture 8: Yield Curve, Pyramid Scheme, Exchange Rate

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Default risk: the risk that the issuer will not pay back. The yield curve is a link between the yield of a bond and it"s maturity. Usually, the longer the maturity, the higher yield. The yield to maturity on an n-year bond is the constant annual interest rate that makes the bond price today equal to the present value of the future payments. Exemple: we have bond that will yield 100$ in after two years. However, in june 1990 as canadians were fearing a recession, there was a negative relationships between maturity and yield. Let"s assume we can buy two bonds: one the promises 100$ in 1 year and another that promises 100$ in two years. If two bonds o er the same expected one year return, then 1+it=pe1t+1/p2t. The price of a two year bond today is the present value of the expected price of the bond next year. Let"s assume that the annual interest rate is constant.

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