5.1.BKM Ch 15

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Exam9
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67437
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5.1.BKM Ch 15
Updated:
2011-02-19 11:41:56
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BKM
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BKM
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  1. Yield curve
    • Plot of yields on various bonds against the time to maturity
    • Pure yield curve: yields on zero-coupon bonds. Use interpolation for large maturities
    • On-the-run yield curve: use yields of coupon bonds. Relies primarily on the most recently issued treasury bonds
  2. Short, Spot, and Forward rates
    • Short rate: interest rate for a specified time interval = ri
    • Spot rate: yield today on a zero coupon bond w/ specified maturity
    • Forward rate: future short rate
  3. Term structure
    Relationship between various spot rates
  4. Expectation hypothesis
    What investors care about is their expected yield from various investments: E(ri) = fi
  5. Liquidity Preference theory
    Term structure merely reflects whether there exists more long term or short term investors
  6. Segmentation theory
    Different borrowers & lenders have different preferences for short, medium, or long-term investment
  7. How to lock-in a forward rate
    • Buy short term zero coupon bond (receive X)
    • Sell long term zero coupon bond (repay X + forward)

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