The Risk and Term Structure of Interest Rates - Term Structure of Interest Rates

7 important questions on The Risk and Term Structure of Interest Rates - Term Structure of Interest Rates

Why do bonds with identical risk, liquidity, and tax characteristics may have different interest rates?

because the time remaining to maturity is different

What is the Yield curve?

A plot of the yield on bonds with differing terms to maturity but the same risk, liquidity and tax considerations. It describes the term structure of interest rates for particular types of bonds, eg government bonds

If the Liquidity premium theory does the job, why talk about Expectations theory and Segmented markets theory?

Because expectations theory and expected markets theory did the ground work and it shows how economists modify theories to improve them when they find that predicted results are inconsistent with empirical evidence.
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What can term structure be used for?

The term structure can be used to compute the present and future values of a risk-free cash flow over different investment horizons. PV= Cn/(1+rn)^n

Give the formula of the Present Value of a Cash Flow Stream Using a Term Structure of Discount Rates

Formula:

What is the formula of a forward rate?

Formula:

How does the forward rate compare to the interest rate that will actually prevail in the future?

It is a good predictor only when investors do not care about risk.

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