Explanations of term structure - We will look at related theories: - Expectations theory - Liquidity Preference (extension of Expectations Theory) - Preferred Habitat (extension of Expectations Theory) Expectations Theory - Key Assumption: many lenders regard short-term and long-term debt as perfect substitutes (other things equal). - Consequence for asset market equilibrium? - Over the same lending period a sequence of shorter-term assets must provide the same yield as longer-term assets - Look at this with a coupon’ bond like a T-Bill (no coupon payment just a single ‘zero payment, the argument can be extended to the more general case) - Notation: R1, R2, RN yields on a 1-yr , 2-yr, N-yr bond. … … E11 is the on a 1-yr bond issued one year from now. E12 is the on a 1-yr bond issued two years from now. EMP would be the yield on a M-year bond issued P-years from now. - Say the lender wants to save funds for two years (two year lending period):
Explanations of term structure - We will look at related theories: - Expectations theory - Liquidity Preference (extension of Expectations Theory) - Preferred Habitat (extension of Expectations Theory) Expectations Theory - Key Assumption: many lenders regard short-term and long-term debt as perfect substitutes (other things equal). - Consequence for asset market equilibrium? - Over the same lending period a sequence of shorter-term assets must provide the same yield as longer-term assets - Look at this with a ‘zero coupon’ bond like a T-Bill (no coupon payment just a single payment, the argument can be extended to the more general case) - Notation: R1, R2, … RN yields on a 1-yr , 2-yr, … N-yr bond. E11 is the on a 1-yr bond issued one year from now. E12 is the on a 1-yr bond issued two years from now. EMP would be the yield on a M-year bond issued P-years from now. - Say the lender wants to save funds for two years (two year lending period):
money_fall17g.docx