Firstly, this report will depict briefly what a bond is in general and how to evaluate its advantages and inconveniences for potential investors. Then it aims at to explain when and why the yield on long-term bonds often exceeds the yield on short-term bonds. The explanation will mainly be based on the three primary theories: the expectations hypothesis, the liquidity premium / preferred habitat theories and the market segmentation theory.
Inhaltsverzeichnis
1 – Abstract
2 – What is a bond?
3 – Three theories to explain interest rates
3.1The pure expectation theory
3.2 Market segmentation theory
3.3 – Premium liquidity theory
4 - Conclusion
5- References
6 - Bibliography
“Explain why the yield on long bonds often exceeds the yield on short bonds;
explain why sometimes it does not.
Are your two explanations consistent with each other?”
1 – Abstract
Firstly, this report will depict briefly what a bond is in general and how to evaluate its advantages and inconveniences for potential investors. Then it aims at to explain when and why the yield on long-term bonds often exceeds the yield on short-term bonds. The explanation will mainly be based on the three primary theories: the expectations hypothesis, the liquidity premium / preferred habitat theories and the market segmentation theory.
2 – What is a bond?
A bond is a financial instrument that represents the debt of a borrower towards a lender. The borrower of the bond promises to pay the lender the principal amount at a specified time (the maturity date) as well as interest at regular intervals during the lifetime of a bond.
There are three groups of bond maturities which have to be distinguished:
- Short-term bonds: Maturities of 1 – 5 years.
- Medium-term bonds: Maturities of 5 – 15 years.
- Long-term bonds: Maturities longer than 15 years.
(smart.momey.com, 2004)
The decision to select a specific bond to suit best the demands and financial needs of the investor is mostly made based on the so called “yield curve”.
[...]
- Quote paper
- Diana Ruthenberg (Author), 2004, The term structure of interests rates, Munich, GRIN Verlag, https://www.grin.com/document/53766
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