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Finance & Accounting
Pages 7 (1757 words)
Money, Banking & Finance Contents Contents 2 Introduction 3 Interest Rates 3 Yield Curve 4 Risk and Its effects 6 Pure Expectation Hypothesis 7 Liquidity preference theory 8 Preferred Habitat Hypothesis 8 Conclusion 9 References 10 Introduction Rates of interest are considered to be the price that is paid for a period of time for the usage of a sum of money.
The present prices of the bonds would help in the determination of the market rate of interest, or the price that would be paid for the use of the money for a period of time. There exists a functional relationship between the rate of interest and the time of the bonds. The term structure of interest rates or the yield curve shows the relationship between the rate of interest and the yields of the bonds with the terms to maturities. The curve is a representation of the various opportunities that may exist for the arbitrage as well as the expectation of the markets about the interest rates that may prevail in future. Interest Rates While carrying out the analysis of the yield curve it is essential to know the components of the nominal interest rates. This equation shows that the real rate of interest represented by r is the main component of the rate of interest. On the other hand, sigma is the risk premium that is being added to the rate of interest which is open to fluctuations due to various events. On the other hand, ? is the representative of the rate of inflation while l is the component that would capture the liquidity. ...
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