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MGT338H5 (6)
Lecture

MGT338

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Department
Management
Course
MGT338H5
Professor
Tanya Kirsch
Semester
Fall

Description
MGT338- Prof: Tanya Definition: 1. The Risk-Free Interest Rate - The risk-free rate is an abstract concept, and usually the yield on short-term government treasury bills is used as a proxy for practical purposes - The Nominal risk-free rate is comprised of two components -> The real rate, which is compensation for deferring consumption -> The expected inflation rate, which is compensation for the expected loss of purchasing power over the term of the short-term T-bill (the Fisher effect) 2. Bond price sensitivity: Interest rate risk factors - Lower coupon bond --> bond is more sensitive to changes in interest rates - Lower maturity --> more sensitive - Lower YTM level --> more sensitive --> greater price change 3. Risks for bondholders - Interest rate risk (change in price due to change in interest rates) - Inflation risk (Fisher effect, i.e. Nominal interest rate = Real rate + Inflation) - Default risk (Measured as yield spread, or default risk premium) - Liquidity risk - Exchange rate risk 4. Three Theories of the Term Structure - Liquidity preference
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