Fin221: CHAPTER 6. THE STRUCTURE OF INTEREST RATES. Why interest rate vary among different financial claims?. Interest Rate Changes & Differences Between Interest Rates (yield) among financial claims Can Be Explained by Several Variables : Term to Maturity. Default Risk. Tax Treatment.
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THE STRUCTURE OF
Interest Rate Changes & Differences Between Interest Rates (yield) among financial claims Can Be Explained by Several Variables :
The Term Structure Formula and The Implied Forward Rate The term structure formula can be used to calculate the implied forward rate (f1) given any two adjacent spot rates (tRn) and (tRn-1). The formula used to calculate the implied forward rate is :
Yield Curves are directly related to the level of economic activity (the Business Cycle) and profits of financial institutions:
An ascending (upward sloping) yield curve indicates the market expectations of higher interest rates, higher periods of economic expansion and/or higher inflation levels.
The yield curve starts sloping upwards at the beginning of the business cycle.
Banks and financial institutions are expected to make better profits. The more the steeper the yield curve, the higher are the expected profits
A descending (downward sloping) yield curve forecasts the opposite indications.
DRP = i - irf