Please boost your Plan to download papers

#
Essay sample - Explain The Term Structure Of Interest Rates

Essay

Finance & Accounting

Pages 7 (1757 words)

Introduction Interest rate is the cost of borrowing money. The term structure of interest rates defines the relationship between short and long term rates and the yield curve depicts this relationship graphically. Knowledge of interest rates is important to both, lenders and borrowers…

Get more done in less time

Let us write a custom essay on your topic

“ Explain The Term Structure Of Interest Rates” with a personal
15% discount.

Order now
## Introduction

Interest date data for bonds with different maturities date is published frequently and investors can use it to determine the term structure of interest rates. Some of the most popular interest rate data sources are the Wall Street Journal, Federal Reserve Bulletin and websites like Bloomberg and CNN. The term structure can be verified at any point in time by using published data from renowned sources. Yield curves are drawn using this published data on interest rates. There are short term and long term interest rates. Since long term interest rates have an element of maturity risk premium (MRP), they are usually higher than short term rates. When researching on the term structure of interest rates, it is important to have knowledge of commonly used terms like the Yield to Maturity (YTM), which is defined as the expected rate of return on a bond held till maturity (Brigham and Ehrhardt, 2010). Another concept which is discussed with YTM is that of the zero coupon bonds (or discount bonds). A zero coupon bond is a financial asset which at the date of maturity T, pays its holder a lump sum amount, with no coupon payments before the date of maturity (hence the name zero-coupon). The YTM at time t of a discount bond with maturity T is the constant and continuously compounded rate of rate of return at which the price of the bond accrues from time t to time T and pays one currency unit to the holder at time T. ...

Download paper
Not exactly what
you need?

### Related papers

Measuring the Sensitivity of a Bond's Price to Changes in the Market Interest Rates
On the other hand, bonds issued by companies are used for long term financing of the firm since they mature after a long period of time, usually more than ten years. Coupons are mostly paid out twice in a year but some could be payable once in a year. On maturity of a given bond, the bondholders are entitled to the principal amount initially invested at the present value at maturity. A bond may be…

Interest Rates Swa[s Require Markets to be Inefficient
Currency exchange tailors international exchange transactions. Interest rates are characteristic of risks that result from the various key constituents of the foreign exchange market. One of these constituents is the interest rate swaps. Foreign exchange and interest rate operations provide opportunities for hedging in the foreign exchange market. Interest rate swaps in this context can be…

Assets and Interest Rates
The higher the credit rating, the lower will be the spread between the US treasury yield and the interest rate of the corporate bond. Here we will assume that the credit rating of the company is AAA. So for a one year bond the rate will be US treasury yield plus 14 basis points. The interest rate will be 4.74 plus 0.14 i.e. 4.88%. Similar will be the calculation for an asset which is 5 year in…

interest rates and exchange rates (the details will be shown in instruction)
This is mainly because of the indifference of the investors. When the interest rate parity is covered, the interest rates and the forward exchange rate between two countries will be in equilibrium. This means that in such equilibrium, each unit return of home currency will be equal to the foreign currency. Thus, the covered interest rate parity states that the forward premium and the interest rate…

Banking - Interest rates
One of the effects of the low interest rate on the Japanese banking sector is reduced productivity. Banks have been forced to operate under low revenue level and net interest margins explain this. Interests that banks charge on their customers on loans forms a significant percentage of their income, while interest that banks pay on their customers’ deposits contribute to the banks’…

Introduction to Financial Markets - Forecasting interest rates
Interest rates, according to the Financial Times , have fallen back to the historic lows, permitting companies, individuals, and some countries to borrow loans at a price lower than before. Contrary to this, households and the extensive economy still fight back in the wake of credit stagnation. The relationship between these two forces, that is the stimulating impact on economic operations of low…