Chapter 15
Overview of Term Structure of Interest Rates
Yield Curves
Expected Interest Rates in Coming Years (Table 15.1)
Assume these rates are known with certainty.
Pricing of Bonds using Expected Rates
Long-Term Rates and Bond Prices using Expected Rates
Suppose you buy the 1-year bond and hold if for one year. What is your HPR?
Consider two 4 year coupon bonds
Law of One Price or No Arbitrage
Law of One Price No Arbitrage
Law of One Price
Callable Bond
Forward Rates from Observed Long-Term Rates
Example of Forward Rates using Table 15.2 Numbers
Downward Sloping Spot Yield Curve
Forward Rates for Downward Sloping Yield Curve
Theories of Term Structure
Expectations Theory
Liquidity Premium Theory
Liquidity Premiums and Yield Curves
Market Segmentation and Preferred Habitat
Email: sjordan@pop.uky.edu
Home Page: www.uky.edu/~sjordan/