06 - Interest Rate Structures
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Total rate of return on an investment.
Comprises investment income and capital gains (losses).
A graph (of a point in time) of yields on a particular security with a range of terms to maturity.
Term Structure of Interest Rates
Relationship between interest rates and term to maturity for debt instruments in the same risk class.
Normal (Positive) Yield Curve
Long-term interest rates are higher than short-term rates.
Inverse (Negative) Yield Curve
Short-term interest rates are higher than long-term rates.
Humped Yield Curve
The shape of the yield curve changes over time from normal to inverse.
Explains the shape of a yield curve through current and future short-term interest rates.
Segmented Markets Theory
All bonds are not perfect substitutes.
Investors have different preferences when investing in either short or longer-term bonds.
Simultaneously taking advantage of buy and sell price differences between markets.
Liquidity Premium Theory
Investors prefer short-term securities, therefore they require compensation to invest longer term.
Compensation received for the increased risk of investing for a longer period.
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