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How Do Risk and Term Structure Affect Interest Rates?
How Do Risk and Term Structure Affect Interest Rates?
How Do Risk
and Term Structure
Affect
Interest Rates?
Chapter Preview
Yield Curves
• Numerical example
─ One-year interest rate over the next five years
are expected to be 5%, 6%, 7%, 8%, and 9%
• Interest rate on two-year bond today:
(5% 6%)/2 5.5%
• Interest rate for five-year bond today:
(5% 6% 7% 8% 9%)/5 7%
• Interest rate for one- to five-year bonds
today:
5%, 5.5%, 6%, 6.5% and 7%
Copyright ©2015 Pearson Education, Inc. All rights reserved. 5-45
Expectations Theory
and Term Structure Facts
Figure 5.7
Yield Curves
for U.S.
Government
Bonds
• Generalize to:
• Numerical Example
l2t 0.25%, l1t 0, i1t 5%, i2t 5.75%