StudentShare
Contact Us
Sign In / Sign Up for FREE
Search
Go to advanced search...
Free

Term Structure of Interest Rates - Essay Example

Cite this document
Summary
Term structure of interest rates is defined as the relation that exists between yield to maturity of zero coupon securities of same credit quality and maturities of zero coupon securities. It explains the reason why different kinds of treasury spot rates will have differences…
Download full paper File format: .doc, available for editing
GRAB THE BEST PAPER98.6% of users find it useful
Term Structure of Interest Rates
Read Text Preview

Extract of sample "Term Structure of Interest Rates"

Term Structure of Interest Rates Term structure of interest rates is defined as the relation that exists between yield to maturity of zero coupon securities of same credit quality and maturities of zero coupon securities. It explains the reason why different kinds of treasury spot rates will have differences. These differences change with the period length. The outline looks at this theory and how it does apply to the market.I. Liquidity preference theory.This theory tries to explain the relation linking the yield of a debit instrument and its maturity period.

This theory is sometimes referred to as the liquidity preference hypothesis.It originated from the Pure Expectations Theory, and it is described as its offshoot.Explanation provided by this theory is that;i. It sees investors as susceptible to change from their favored maturity, if they are offered a sum that is higher than expected.ii. It assumes a comparatively small number of long-term investors. This is to offer premiums to encourage the number of long-term investors ( Gibson, Rajna, François-Serge Lhabitant, and D Talay 311).

The long-term bonds have to offer premiums in order to support investors to hold them.iii. As opposed to the other theories, the yield curve is expected to have a positive slope.II. Expectation Theory.This theory states that, a forecast of the future interest rates is made before investing in bonds.Some investors invest in long-term bonds because they believe interest rates will decline (Sutton, Gregory D 211).Others invest in short-term securities because of the believe that the rates will rise.

The slope of the yield curve will change depending upon the larger group.Short description of the theory.According to this theory, a rising yield curve will occur if the economy is strong. Strong economic growth tends to increase the interest rates as;i. Consumers have a loan of more money for cars and houses.ii. Businesses borrow more money so that they can finance expansion of inventories.This theory is sometimes used to give details about the yield curve. It has proven inaccurate in practice because the interest rates tend to remain flat I.

Market Segmentation TheoryThis theory states that in a market there are different interest rates of close to three rates but not one ( Lutz, Friedrich A, and Claus Wittich 196). They include; short term, long-term and intermediate-term. The methods for segmenting consumer markets include;i. Geographical segmentation. This approach combines demographic and geographic data to come up with an accurate and specific profile.ii. Behavioral segmentation. Divides consumers into groups mainly according to knowledge and attitude towards response to a product.iii. Segmentation by occasions.

This relies on the special needs and desires.Ho-Lee ModelThis model is a significant concept of financial mathematics. It deals with rates of interest that are supposed to succeed in the future. Model descriptionIt considers the up to date yield curve to be fixed.With this model;There is an assumption that there would be one up term structure and a single down term structure.In this case, a period of one year is considered.This model is represented in equation form as follows;drt = φtdt + σdWtDothan ModelThis model is a short-term interest rate model that is based on algebraic Brownian motion.

In this model, Zero-coupon bond prices are computed by solving the associated PDE. This is done using heat kernels and the Hartman-Watson distributions.Several integral formulas are obtained for price P (t, T) at time t>0 of a bond that has maturity T>0 complete those of the original paper. They do not satisfy the boundary condition P (T, T) which is equal to one (Cvitanić, Jakša, and Fernando Zapatero 318).Works citedCvitanić, Jakša, and Fernando Zapatero. Introduction to the Economics and Mathematics of Financial Markets.

Cambridge, Mass. [u.a.: MIT Press, 2004.Gibson, Rajna, François-Serge Lhabitant, and D Talay. Modeling the Term Structure of Interest Rates: A Review of the Literature. Boston: Now, 2010.Lutz, Friedrich A, and Claus Wittich. The Theory of Interest. New Brunswick (N.J.: Aldine Transaction, 2006Sutton, Gregory D. A Defence of the Expectations Theory As a Model of Us Long-Term Interest Rates. Basle: Bank for International Settlements, 2000http://finance.mapsofworld.com/finance-theory/ho-lee-model.

htmlhttp://www.coursework4you.co.uk/essays-and-dissertations/sample88.phphttp://campus.murraystate.edu/academic/faculty/lguin/Schematic/Theory_LiqPrem.htm

Read More
Cite this document
  • APA
  • MLA
  • CHICAGO
(“Term Structure of Interest Rates Essay Example | Topics and Well Written Essays - 500 words”, n.d.)
Term Structure of Interest Rates Essay Example | Topics and Well Written Essays - 500 words. Retrieved from https://studentshare.org/finance-accounting/1629200-term-structure-of-interest-rates
(Term Structure of Interest Rates Essay Example | Topics and Well Written Essays - 500 Words)
Term Structure of Interest Rates Essay Example | Topics and Well Written Essays - 500 Words. https://studentshare.org/finance-accounting/1629200-term-structure-of-interest-rates.
“Term Structure of Interest Rates Essay Example | Topics and Well Written Essays - 500 Words”, n.d. https://studentshare.org/finance-accounting/1629200-term-structure-of-interest-rates.
  • Cited: 0 times

CHECK THESE SAMPLES OF Term Structure of Interest Rates

The Avis Budget Group in the Business of Vehicle Rental Services

term Paper Title Your Name (14 pt Times New Roman) BA 301 Final term Paper Section Number (e.... The company targets to achieve quality in the business and services of Avis and Budget for the long term sustainable competitive advantage.... .... Section 002) Date Table of Contents Table of Contents 3 EXECUTIVE SUMMARY 4 POSITION 6 MISSION 7 The mission of the company is to provide exemplary leadership in services and support to the workforce of the company....
18 Pages (4500 words) Term Paper

International Business Finance at Vodafone Plc

Fluctuations in forex rates have a direct impact on the sales revenues, and thus the profits of importers and exporters.... There are 4 factors that influence the fluctuation of forex rates:It is defined as the elasticity of the real domestic currency value of Assets and Liabilities, appearing in the financial statements to unanticipated changes in exchange rates.... t is defined as the elasticity of the real domestic currency value of Assets and Liabilities when assets and liabilities are liquidated with respect to unexpected changes in exchange rates for exporting, importing, or import-substituting firms....
8 Pages (2000 words) Term Paper

The Reaction of the Markets to the Step of ECB to Raise Interest Rates

The author describes the reaction of the markets when in December of 2005, the European Central Bank raised interest rates to 2.... nbsp;… The reaction of the markets to this step of ECB was typical as the shares prices rose and euro declined against the dollar within several days about the rising of the interest rates had been made (However, the reaction of American markets was more typical one as the Dow Jones Stock Index of 600 major European companies fell by 2 points)....
4 Pages (1000 words) Term Paper

The Nebula Furniture Business Plan

These financial bodies are responsible for determining the interest rates and the cost of capital that further affects the cost of borrowing and resource acquisition.... In Canada, the monetary authority and central bank are charged with the responsibility of regulating the interest rates and the cost of borrowing capital resources.... The interest rates charged by the financial institution and monetary authorities of Canada influences the cost of capital and borrowings....
10 Pages (2500 words) Term Paper

The New Health Unit

The paper is based on the medical unit to be started which is not for profit organization with its mission of providing different medical services, creating awareness and sensitizing the community on teen pregnancy.... It will be based in Paterson, New Jersey.... hellip; The new unit is part of the largest health care system, Metro Hospital Network....
8 Pages (2000 words) Term Paper

Bank Profit Rate

hellip; The exterior factors consist of market concentration, rate of inflation, interest rates, the size of the banking industry and Gross Domestic Product (GDP).... A study by Bourke (1989)  shows that there was a good affiliation between capital ratios, the management of quality, interest rates that are long-term, liquidity risks and profitability.... Conversely, high-interest rates occasioned by ownership strategies were identified as the main factor to low profitability....
3 Pages (750 words) Term Paper

Canadian Farming Industry

The "Canadian Farming Industry" paper states that in the farm field, many problems are attributed to Canadian consumer's refusal to recognize and pay for value-added to the products produced by the small farmers.... Because of this, farmers are not able to recover their investments.... nbsp;… The farmers are not in a position to bear the smallest price increase in power tariff....
8 Pages (2000 words) Term Paper

Housing Studies: Managing the New Housing

Emphasizing upon the present scenario in the UK housing industry, the major purpose of this report is to identify and analyze the potential risk areas that create an impact upon the current business practices of small and medium-sized housing associations.... nbsp;… Accessing adequate financial support can be regarded as one of the major risk areas for the developing medium-sized HAs....
13 Pages (3250 words) Term Paper
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.
Contact Us