interest rates and shit Flashcards

1
Q

The Yield Curve

A

plot of yield to maturity as a function of time to maturity

displays the relationship between YTM and time to maturity

Information on expected future short-term rates can be implied

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2
Q

are Yields on different maturity bonds equal?

A

no

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3
Q

Bond stripping and bond reconstitution may offer opportunities for what under Law of One Price?

A

for arbitrage

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4
Q

can bond coupon payments be seen as individual coupon bonds?

what does this mean for bond prices

A

yes

we need to discount every cash flow (bond and principal) at the appropriate discount rate corresponding to the maturity of this CF

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5
Q

Stripped bonds

A

zero-coupon bonds created by selling each coupon (or principal payment) made by the governments’ bond as a separate cash flow

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6
Q

how to determined the price of stripped bonds

A

To determine the price of its zero-coupon bonds we need to obtain their present value

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7
Q

There different yield curves used in the market

A

Pure yield curve

On-the-run yield curve

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8
Q

Pure yield curve

A

this is the yield curve for stripped or zero-coupon bonds

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9
Q

On-the-run yield curve

A

constructed from the YTM of different maturities recently issued coupon paying bonds

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10
Q

the Spot Rate

A

the yield to maturity on zero-coupon bonds

refers to the interest rate valid from today till the maturity of the corresponding zero-coupon bond

the geometric average of its component short rates

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11
Q

Short rate

A

refers to interest rate available for a specific time interval at a specific period of time

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12
Q

how to calculate short rate

A

r2 = (1 + y2) / (1 + r1) - 1

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13
Q

how to calculate the spot rate for two year holding period

A

y2 = ((1 + r1)(1 + r2))^(1/2)

A spot rate is the geometric average of its component short rates

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14
Q

why does the long term yield curve slope up

A

because of interest risk premium

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15
Q

when does the Yield curve slope up?

what could this indicate

A

When next year’s short rate, r2 > r1, the yield curve slopes up

May indicate rates are expected to rise

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16
Q

when does the Yield curve slope down?

what could this indicate

A

When next year’s short rate, r2 < r1, the yield curve slopes down

17
Q

hot calculate a forward rate

A

(1 + fn) = ((1 + yn)^n) / (1 + yn-1)^(n-1)

18
Q

what happens to the liquidity premiums when short rates and forward rates are expected to remain constant?

A

liquidity premiums remain constant

19
Q

what happens to the liquidity premiums when short rates are expected to decline and forward rates are expected to increase?

A

liquidity premiums increases

20
Q

what happens to the liquidity premiums when short rates and forward rates are expected to remain decrease at the same rate?

A

liquidity premiums remain constant

21
Q

what happens to the liquidity premiums when short rates increase but forward rates are expected to remain increase even more at the same rate?

A

liquidity premiums increases

22
Q

The expectations hypothesis

A

states that forward rates correspond to the future interest rates expected by the market

Observed long-term rate is a function of today’s short term rate and expected future short-term rates

fn = E(rn) such that liquidity premiums are zero

23
Q

The liquidity preference hypothesis

A

states that the market is dominated by short term investors who require a premium to induce them to invest in longer term instruments instead of investing in short term ones

24
Q

Longer term rates being larger than shorter term rates lead to?

A

having higher forward rates than spot rates

Long-term bonds are more risky: fn > E(rn)

The excess of fn over E(rn) is the liquidity premium

The yield curve has an upward bias built into the long-term rates because of the liquidity premium

25
what does an up sloping yield curve mean?
Rates are expected to rise or Investors require large liquidity premiums to hold long term bonds
26
how is the yield curve is a good predictor of the business cycle?
Long term rates tend to rise in anticipation of economic expansion Inverted yield curve may indicate that interest rates are expected to fall and signal a recession