asher
Uploaded by
40 SLIDES
492 VUES
400LIKES

Understanding Term Structures of Interest Rates

DESCRIPTION

Explore the Term Structure of Interest Rates with real interest rate considerations, anomalies in the yield curve, and the Expectations Hypothesis. Learn why holding short-term vs. long-term bonds and their implications.

1 / 40

Télécharger la présentation

Understanding Term Structures of Interest Rates

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Chapter 7:Learning Objectives • Term Structure of Interest Rates

  2. Chapter 7:Learning Objectives • Term Structure of Interest Rates • expectations & other hypotheses

  3. Chapter 7:Learning Objectives • Term Structure of Interest Rates • expectations & other hypotheses • real interest rate considerations

  4. Chapter 7:Learning Objectives • Term Structure of Interest Rates • expectations & other hypotheses • real interest rate considerations • Anomalies in the yield curve

  5. Long-term and short-term Government of Canada Bond Yields

  6. The Term Structure of Interest Rates: The Expectations Hypothesis • Why hold short-term vs. Long-term bonds? • Should their yields be linked to each other? E11 R1 R2

  7. The Key Relations in the Expectations Hypothesis The Simplest case: R2 = (R1 + E11)/2 The General case: Rn = (R1 + E11 + E21 + … + En-11)/n

  8. The Expectations Hypothesis: Two Examples

  9. Hypothetical Yield Curves Yield Rising Constant Falling Term

  10. Financial Focus 7.1 • Hypothetical YC are an estimate of the relationship between yield and term to maturity Yield Term

  11. Financial Focus 7.1 • Hypothetical YC are an estimate of the relationship between yield and term to maturity • Yield curves must be constructed for similar types of financial instruments Yield Term

  12. Financial Focus 7.1 • Hypothetical YC are an estimate of the relationship between yield and term to maturity • Yield curves must be constructed for similar types of financial instruments • One must not read too much into the shape/slope of a yield curve Yield Term

  13. Yield Curve Puzzles • The Yield curve is generally upward sloping

  14. Yield Curve Puzzles • The Yield curve is generally upward sloping • Table 7.3 shows that the term premium is generally positive

  15. Table 7.3: Yield differential relative to 90-day treasury bills

  16. Yield Curve Puzzles • The Yield curve is generally upward sloping • Table 7.3 shows that the term premium is generally positive • The yield curve tends to shift over time

  17. Yield Curve Puzzles • The Yield curve is generally upward sloping • Table 7.3 shows that the term premium is generally positive • The yield curve tends to shift over time • Figure 7.3 shows that inflation tends to shift the entire yield curve

  18. Shifting Yield Curves

  19. Yield Curve Puzzles • The Yield curve is generally upward sloping • Table 7.3 shows that the term premium is generally positive • The yield curve tends to shift over time • Figure 7.3 shows that inflation tends to shift the entire yield curve • The slope of the yield curve tends to predict future economic activity

  20. Yield Curves and Monetary Policy

  21. Figure 7.4: Shifting yield curves

  22. Figure 7.5: The yield spread and recessions in Canada

  23. POINT: COUNTERPOINT: POINT-COUNTERPOINT 7.1: The Information Content in Yield Curves

  24. POINT: The YC is easy to understand COUNTERPOINT: POINT-COUNTERPOINT 7.1: The Information Content in Yield Curves

  25. POINT: The YC is easy to understand At maturities of <= 3 yrs inflation forecasting performance is good COUNTERPOINT: POINT-COUNTERPOINT 7.1: The Information Content in Yield Curves

  26. POINT: The YC is easy to understand At maturities of <= 3 yrs inflation forecasting performance is good Useful pedagogical device to understanding central bank policies COUNTERPOINT: POINT-COUNTERPOINT 7.1: The Information Content in Yield Curves

  27. POINT: The YC is easy to understand At maturities of <= 3 yrs inflation forecasting performance is good Useful pedagogical device to understanding central bank policies Helps to understand debt management COUNTERPOINT: POINT-COUNTERPOINT 7.1: The Information Content in Yield Curves

  28. POINT: The YC is easy to understand At maturities of <= 3 yrs inflation forecasting performance is good Useful pedagogical device to understanding central bank policies Helps to understand debt management COUNTERPOINT: LT and ST bonds are not good substitutes POINT-COUNTERPOINT 7.1: The Information Content in Yield Curves

  29. POINT: The YC is easy to understand At maturities of <= 3 yrs inflation forecasting performance is good Useful pedagogical device to understanding central bank policies Helps to understand debt management COUNTERPOINT: LT and ST bonds are not good substitutes Transactions costs can be significant POINT-COUNTERPOINT 7.1: The Information Content in Yield Curves

  30. POINT: The YC is easy to understand At maturities of <= 3 yrs inflation forecasting performance is good Useful pedagogical device to understanding central bank policies Helps to understand debt management COUNTERPOINT: LT and ST bonds are not good substitutes Transactions costs can be significant Empirical evidence for EH weakest for US POINT-COUNTERPOINT 7.1: The Information Content in Yield Curves

  31. POINT: The YC is easy to understand At maturities of <= 3 yrs inflation forecasting performance is good Useful pedagogical device to understanding central bank policies Helps to understand debt management COUNTERPOINT: LT and ST bonds are not good substitutes Transactions costs can be significant Empirical evidence for EH weakest for US Ignores many other factors that determine yields over time POINT-COUNTERPOINT 7.1: The Information Content in Yield Curves

  32. Competing Explanations of the Term Structure • The Liquidity Premium theory: Holding longer term bonds in inherently riskier because the market is thinner

  33. LIQUIDITY PREMIUM

  34. Competing Explanations of the Term Structure • The Liquidity Premium theory: Holding longer term bonds in inherently riskier because the market is thinner • The Market Segmentation theory: Short-term and long-term markets are separate

  35. MARKET SEGMENTATION

  36. Competing Explanations of the Term Structure • The Liquidity Premium theory: Holding longer term bonds in inherently riskier because the market is thinner • The Market Segmentation theory: Short-term and long-term markets are separate • The Preferred-Habitat theory: there is limited substitutability between short-term and long-term bonds

  37. Figure 7.7: Interest rates and the maturity structure of government of Canada debt

  38. Summary • The term structure of interest rates explains why interest rates differ when their term to maturity differs

  39. Summary • The term structure of interest rates explains why interest rates differ when their term to maturity differs • The expectations hypothesis predicts that long term rates are averages of expected short-term rates

  40. Summary • The term structure of interest rates explains why interest rates differ when their term to maturity differs • The expectations hypothesis predicts that long term rates are averages of expected short-term rates • Despite the appeal of the expectations hypothesis there are “puzzles” in the behaviour of the yield curve

More Related