Security Valuation

Question 1

Term Structure Theories

Answer 1

It explains the relationship between interest rates or bond yields and different terms or maturities. 3 Term structures theories are as follows:

a. Unbiased Expectation Theory
b. Liquidity Preference Theory
c. Preferred Habitat Theory

Question 2

Differences between Repo and Reverse Repo

Answer 2

 Repo rate is the rate at which RBI lends to Commercial Banks. On the other hand, Reverse Repo is the rate at which Commercial Banks lend to RBI.

 Purpose of Repo is to fulfill deficiency of funds. While the purpose of Reverse repo is to reduce excess liquidity in the economy.

 Repo rate is comparatively high in comparison to Reverse Repo rate.

 Repo rate strives to contain inflation in the economy. While the Reverse repo aims to control money supply in the economy.