Nobody downloaded yet

Fixed Interest Securities and Derivatives - Literature review Example

Comments (0)
Summary
The study “Fixed Interest Securities and Derivatives” was designed to substantiate the Expectations Theory of the term structure and investigated relationships between yields of diverse maturities and the extended original bivariate approach to the multivariate cases…
Download full paperFile format: .doc, available for editing
GRAB THE BEST PAPER91.4% of users find it useful

Extract of sample "Fixed Interest Securities and Derivatives"

Download file to see previous pages The expectations theory states that a longer-term bond rate is only the mean of anticipated one-period rates for the period of the bond with the addition of some fixed term premium. Based on this theory, the spreads amongst diverse maturities constitute the cointegrating vectors. If there was found only one general trend, it was resolved that the term premia then must be mean-returning if not constant.
Shea (1992) studied a more extensive set of yields, which included the long-term maturities up to 25 years. The results of his study supported the verdicts of Hall et al. (1992) for the short end of the yield curve but eliminated fixed spreads which comprised the longer-term maturities. Working upon Shea (1992), other investigators discovered three common trends when they included yields of longer maturities. Zhang (1993) established this for US data while Carstensen (2003) for German data.
There are a variety of hypotheses that can describe any slope which the yield curve may take. The simplest theory is the pure expectations theory. The use of the expectations theory in the study of the yield curve can be deciphered as far back as that Fisher (1896). The Expectations Theory presumes that all financial tools on the yield curve are absolutely substitutable. In this, the forward rates solely correspond to the predictable future rates. As these rates either rise or fall for any time period, the shape of the yield curve can be either upward sloped or downward for that particular period.
Peterson (2001) had actually attempted to make clear the inaccuracy of the Expectations Theory. He states that “there is a rational bias for investors to go ‘with the crowd.’ Specifically, he shows that an institutional investor going against the crowd has a high degree of visibility to one’s superiors. The risk/reward calculation is biased toward not ‘sticking one’s neck out.’ If he goes against the crowd and rightly predicts the market, he gains some positive recognition. However, if he goes against the crowd and wrongly predicts the market’s movements, then it could be the end of his career.” Consequently, the estimates are logically colored to go along with the crowd. These activities skew the yield curve and develop results that contravene the Expectations Theory. ...Download file to see next pagesRead More
Comments (0)
Click to create a comment or rate a document

CHECK THESE SAMPLES OF Fixed Interest Securities and Derivatives

Loans. Variable interest and fixed interest loans

...enable a person to negotiate better terms of credit if the market conditions become favorable. Some people on the other hand prefer fixed loans because of the security of knowing the exact amount you have to pay on a monthly basis. When the interest rate goes down it is better to have a flexible interest loan, but when it goes up the fixed payment loan is the best alternative. 5. The types of financial institutions that deal in very short term loans such as 15 to 30 loans have a lot of business because everyone every so often faces an emergency that requires instant cash. People also on many occasions are not able to keep up with the budget and the run...
3 Pages(750 words)Essay

The Black Model for Interest Rate Derivatives

...? The Black Model for Interest Rate Derivatives Table of Contents Introduction 2 Overview and Development of Black Model2 Applications of Black Model in pricing European Options 4 Validity of Black Model 5 Other Applications of Black Model 6 Conclusion 7 Bibliography 8 Introduction The following is a discussion and evaluation of the Black Model for interest rate derivates. Despite existence of other models for interest rate derivatives, the Black Model has extensively been applied within financial markets. This paper attempts an evaluation of the model whilst developing a concluding remark on the model with reference to...
6 Pages(1500 words)Essay

Derivatives

..., interest rates, stocks, bonds, and commodities. Derivative contracts are categorized into two groups that comprise of the exchange-traded derivatives, which are derivatives that are transacted in a specialized derivatives exchange. The second group of derivatives is the privately traded derivatives that are traded over-the-counter and therefore, the transactions are not undertaken with the assistance or expertise of an intermediary or the exchange platform (Institute for Financial Markets, 2011). An example of the privately traded derivates is the swaps. Additionally, derivatives are...
7 Pages(1750 words)Literature review

The Role of Fixed Income Securities in Investment Portfolio

...Political Factors Any change in the political leadership of the country/region could trigger a change in the economic scenario, specifically, bond markets. A populist government might hike the rate of interest from Fixed income securities. Another leader might want to bring down the rates of such instruments. Thus, the returns from fixed income securities remain unchanged over the period for which they are invested in. Beyond the period or before the period of investment, the rates would be prone to vary. Economic Factors Changes in the reserve ratio (CRR) stipulated by the Reserve/Federal Bank lead to changes in the rate of...
4 Pages(1000 words)Assignment

Finance - Fixed Income Securities

...Introduction The term structure of fixed income securities indicates the relationship between different bonds having different maturities. The term structure is usually depicted through a yield curve which indicates as the relationship between the interest rates on the fixed income security against their terms. The longer the term of the interest rates the higher the interest rates will be as in comparison to short term interest rates which are mostly lower than the long term interest rates. Yield curve analysis is considered as one of the most valuable bond valuation techniques and is...
6 Pages(1500 words)Essay

Securities Law

...Securities Law Introduction Securities Law is a body of rules and regulations dealing with securities,shares, stocks, bonds and debentures. The government or corporations do the work of issuing securities. Securities law is a form of payment that evident the ownership of dividends and other financial obligations. Various investments scenarios are available at the securities level. Some information is extremely essential for an investor to know. This information may sometimes not be available in other texts. Federal Securities and Blue Sky Laws Variety of regulation affects securities. This effect is...
2 Pages(500 words)Research Paper

Derivatives

... US BBB-corporate bonds over the next year. State what different types of option you might use to implement this strategy I could use the open swap position to hedge the $10m by following the strategy of hedging a fixed-rate portion of the swap against a rise in interest rates by selling a specific number of contracts. In most cases, receiving a fixed rate on a swap is the same as buying a bond with the corresponding hedge consisting of selling bond futures contracts. The method is slightly different from the one described in question one above as in question one I would concentrate on buy positions and sell position and hedge when the correlation is greater to make the process more efficient (TMXGroup, 2012). Question Three: You... Question...
2 Pages(500 words)Essay

Summary of fixed income securities

...Fixed income securities of the of the Number: Fixed income security concept Companies can raise capital either through fixed or variable income securities. Fixed income securities require companies to pay a definite sum of money as interests at periodic intervals to the investors. The interest amounts are fixed and do not fluctuate alongside of the revenues earned. The firm which issues such fixed income securities are known as the ‘issuer’. Government as well as non-government bodies can be the issuers of such...
5 Pages(1250 words)Essay

Derivatives

...Derivatives Introduction Derivatives are the securities whose values or prices are totally dependent on one or more than one underlying entities. Those underlying entities are maybe index, assets and interest rates. It is a type of financial contract. It is more of a precautionary measure to secure the money against the volatile nature of the international business. Over the years usages of the derivatives have increased a lot. To protect their moneys various organizations and government agencies are using these contracts. Discussion Explain how derivatives can be used There are many numbers of...
3 Pages(750 words)Assignment

Fixed Income Securities

... FIXED INCOME SECURITIES Question 1: a) The organization’s total debt as at February 2001 is found by adding all the long-term debts with the short-term debts. The long term debts is found by adding the non revolving term facilities and the revolving term facilities whereas the short term debts are depicted from the senior subordinated loans. Therefore, the total long-term debts of the company will be calculated as follows: Item U.S $ Fiscal in C.A.D $ Long term debts 243+243 1.51x 243= (366.93)x2=733.86+450+25+25= 1.23386B Short term debts - CAD $525M Total debts - CAD$ 1.78B Question B: To find the interest expense, we have to include the amortization of the deferred financial costs...
11 Pages(2750 words)Assignment
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.

Let us find you another Literature review on topic Fixed Interest Securities and Derivatives for FREE!

Contact Us