Investment Management: The Term Structure of Interest Rate

Pages: 8 (1178 words) Published: October 13, 2014

NORTHCENTRAL UNIVERSITY
ASSIGNMENT COVER SHEET

Student: ODEDOYIN ABEL

THIS FORM MUST BE COMPLETELY FILLED IN

Follow these procedures: If requested by your instructor, please include an assignment cover sheet. This will become the first page of your assignment. In addition, your assignment header should include your last name, first initial, course code, dash, and assignment number. This should be left justified, with the page number right justified. For example:

Student: ODEDOYIN A FIN 5013-8 ACTIVITY 3

Save a copy of your assignments: You may need to re-submit an assignment at your instructor’s request. Make sure you save your files in accessible location.

Academic integrity: All work submitted in each course must be your own original work. This includes all assignments, exams, term papers, and other projects required by your instructor. Knowingly submitting another person’s work as your own, without properly citing the source of the work, is considered plagiarism. This will result in an unsatisfactory grade for the work submitted or for the entire course. It may also result in academic dismissal from the University.

FIN 5013-8 TIPPINS,STEVEN

INVESTMENT MANAGEMENT
ACTIVITY 3

Faculty Use Only




INTRODUCTION In contrast to the asset price world, there is no commonly accepted model for the movement of the underlying in the interest rate world. Consequently, there are a number of different approaches to the pricing of fixed-income products. The simplest approach is to price a product of the term structure of interest rates which also known as yield curve. This method is effective for simple contracts, for instance bonds. Hiriyappa (2008)., This paper develops a technique of fitting a yield curve called “the term structure of interest rate” to observations on the prices securities with varying maturities and coupon rates. Also I will discuss the theories associated with term structure of interest rates, measure and describe the investment value of duration. THE TERM STRUCTURE OF INTEREST RATE The term structure of interest rates is also known as yield curve is a very common bond valuation method, Constructed by graphing the yield to maturities and the respective maturity dates of benchmark fixed-income securities. The yield curve is a measure of the market's expectations of future interest rates given the current market conditions. Bodie, Kane, Marcus (2011), There are 3 main patters of created the term structure of interest rate are; Normal curve this is the curve that forms during the market conditions wherein investors generally believe that there will be no significant changes in economy, such as inflation rates, and the economy will continue growth at a normal rate. The graph bellow shown the normal yield cure

The graph above shows that price of the bond decrease as yield increase Flat Yield curve the curve indicates, the market environment is sending mixed signals to investors, who are interpreting interest movement in various ways. The graph below shows the flat yield curve, the graph also explain the theory of Expectations Hypothesis.

Invested yield curve, this curve is form during the extraordinary market conditions wherein the expectation of investors are completely the inverse of those demonstrated by the normal curve. Rufus I (2004)

THEORIES OF THE TERM STRUCTURE The Expectations Hypothesis, This hypothesis state that the forward rate equals the market consensus expectation of the future short interest rate; that is f2=E (r2) and liquidity premium are zero. For example, Suppose, one-year rates over the next five years are 4%, 7%, 7%, 8% and...
Continue Reading

Please join StudyMode to read the full document

You May Also Find These Documents Helpful

  • term structure of interest rates Essay
  • Term Structure of Interest Rate Essay
  • Term Structure of Interest Rates Essay
  • Term Structure of Interest Rates Essay
  • Term Structure of Interest Rate Essay
  • Risk and Term Structure of Interest Rates Research Paper
  • Investment Management Essay
  • Low Interest Rate Long Term Effect Essay

Become a StudyMode Member

Sign Up - It's Free