humped yield curve quizlet
The shape of the yield curve changes over time as interest rates change in the marketplace. Possibly because personally I’m a bit deep into bonds, not many would agree with the second part though. Upward sloping B. © CSI GLOBAL EDUCATION INC. (2011) 7•3 Yield Curve and Bond Valuation 1.1 Overview : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : 1.2 The Instruments : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : | | 2. Pricing and Trading What is the Term Structure of Interest Rates? 1. • Duration as a Measure of Bond Price Volatility Defi ne present value and the discount rate, and perform calculations relating to the time value of Y ield curves are one of the most fundamental measures of the effect on the economy due to various factors and are also an important driver of an economy. Problems 5-18 through 5-23 of chapter 5 are related to this topic. a. The primary investments of FFC are collateralized debt obligation, mortgage-backed securities, auction-rate securities, equity securities in nonpublic companies, interest rate swaps, and a fuel swap for gasoline. Be sure you know how to calculate any given components with given supporting information. B) An increase in default risk on corporate bonds lowers the demand for these bonds, but increases the demand for default-free bonds. If interest rates have been high but are expected to drop. | sales maximization | | Bond yields (7-7) E) All of the above are true statements. • The Impact of Maturity * Franking (imputation) credit: Dividends paid have a credit attached for tax paid by the corporation This is a simple strategy and not necessarily a risky trade since it is very likely that the yields will converge once the on-the-run bonds become off-the-run. Flat (Humped) Yield Curve. © CSI GLOBAL 7•2 EDUCATION INC. (2011) INTRODUCTION Your boss has developed the following set of questions which you must ask and answer to explain the U.S. financial system to Dellatorre. The annual payments are $6,202.70. Financial assets are intangible. Plot a yield curve based on these data. * Double taxation in the US (only concerned with ‘C’ corporations) The "Liquidity preference". ...Exam 2 Study Guide An upward-sloping yield curve: Term. when there was a specifiable future date(usually medium-term fixed maturities) by which convergence of offsetting short and long positions in similar instruments should occur. government vs. corporate), etc. | Your company has received a $50,000 loan from an industrial finance company. Face value of 5-year bond= 0.2023MM*1.479%=217727 Bond valuation (7-3) ------------------------------------------------- | | 5. A yield curve plots the yield to maturity (TYM) of similar debt securities, against the time to maturity (term).A normal yield curve is upward-sloping and shows higher yield for longer maturity due to the risks associated with the passage of time. - Segmented Market Theory of the Yield Curve. In other words, reading the sections above and attempting the problems recommended should put you in a comfortable position to handle majority of questions in the exam. 9 | With perfect negative correlation, the risk on a portfolio can be zero if an appropriate allocation of funds is made | 1 | When the yield curve is flat, then it generally indicates a slow down in the economy so investors are not being compensated for the risk of taking on longer term bonds. | In cases of zero correlations between the assets, risk can be fully eliminated through diversification | | Corporations Four Types of Firms US | Four Types of Firms AUS | $12220 from: Daisy Downward sloping C. Horizontal D. Humped 6-16 Chapter 06 - Working Capital and the Financing Decision 96. | | 5. * Shareholders: Own the Corp, but have no say in daily operations 1. However, the yield curve can be inverted and downward-sloping if the economy is expected to slow or a recession is imminent. 1. Yield curves are usually upward sloping asymptotically: the longer the maturity, the higher the yield, with diminishing marginal increases (that is, as one moves to the right, the curve flattens out).. What are Bond Indexes? This often happens when a company has more than one holding company listed in different markets (e.g. Since 1986 the yield curve has had some measure of humpedness 25% of the time. Value of the portfolio= 1003170/1.00352^(11/12)-217727/1.0204^(59/11)=$802797 Implications for corporate managers & investors (8-6) The different yields currently available on debt securities of similar credit quality according to their term-to-maturity, typically represented graphically. 2. Why is corporate finance important to all managers? Repo dealer 1. money, bond pricing and yield. I will do so by explaining the importance of understanding the term structure, as well as the three theories that support the term structure; the expectations theory, the segmented markets theory, and the liquidity premium theory. | | In this section, we will focus on only 3 of them: default risk, liquidity, and...... ...© CSI GLOBAL EDUCATION INC. (2011) 7•1 ABSTRACT In other words, we want to look at the risk structure of interest rates. * Legal entity separate from its owners must be legally formed * Ownership represented by shares of stock, sum of which is OE Again a market is a transaction, not a physical location. * Company earning for $1 dividend income: gross dividend=div1-tc Chapter 7 This creates a rounded or humped curve. 4. Bond yields or interest rates are plotted against X-axis while time horizons are plotted on Y-Axis. Learn vocabulary, terms, and more with flashcards, games, and other study tools. What are Bond-Switching Strategies? This is the most common shape for the curve and, therefore, is referred to as the normal curve. If the company is paying 9% interest per year, how many loan payments must the company make? 2. A yield curve is a way to easily visualize this difference; it's a graphical representation of the yields available for bonds of equal credit quality and different maturity dates. NEW! 3. According to Hubbard and O’Brien, the term structure “is the relationship among the interest rates on bonds that are otherwise similar but have different maturities.” Term structure is most commonly analyzed by looking at the Treasury yield curve, which is the relationship of interest rates on Treasury bonds with different maturities on a particular day. Defi ne a real rate of return and a yield curve, and evaluate three theories of interest rate • Calculating the Yield to Maturity on a Bond Since the yield spread between on- and off-the-run bonds is very narrow, it is possible to make significant profits only with large positions. Humped yield curves are a sign of economic transition, and could indicate slowed economic growth. Short 5-year bond value=$0.2023 MM A parallel shift in the yield curve neither flattens nor steepens the yield curve. Money markets are markets where money is borrowed for short time periods, usually less than a year. These are markets where financial assets sold and bought. In addition to these notes, please read chapter 3 and pages 191 through 206 of chapter 5. 2. Long-term bonds yield more than intermediate and short-term bonds. Analyze the impact of fi xed-income pricing properties on bond prices. Andrew Ang* and Michael Sherris† * Personal tax rate on dividend income is 15% determination. | depends upon the number of discount periods. These developments extend the concepts of immunization and matching to a stochastic interest rate environment. 3. If you think about it intuitively, if you are lending your money for a longer period of time, you expect to earn a higher compensation for that. | | 3. ...Chapter 6 Rate The Risk and Term Structure of Interest In the previous section, we have generalized our discussion of the influence of various factors on the behavior in interest rate by examining only a particular type of bonds: namely, the 1-year zero coupon bond. Each investment and provide appropriate authoritative guidance to support the determination and valuation based... S of interest rates 1 default-free bonds a year the interest rates for 30-year,. Return and a 10-year note is at 2 %, and more with flashcards, games, and indicate... 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