Fins 2624 Week 2 Summary PDF

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Download Fins 2624 Week 2 Summary PDF

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Term structure of interest rates: Relationship between the interest rate or bonds with different terms/maturities.  If the prices of the bonds imply inconsistent spot rates then an arbitrage opportunity arises. Arbitrage opportunity: Construct a synthetic version of the bond from previous bonds.  Buying a bond means we are lending money to the issuer.  Selling a bond means we are borrowing from the bondholder. Liquidity risk: Investors with short term horizons often have the buy and sell strategy more riskier. Reinvestment risk: Investors with longer term horizons often have the reinvestment strategy more riskier. Liquidity preference hypothesis LPH: Case where most investors in the market have shorter horizons and thus prefer short term investments.  Investors with this shorter term horizon will thus require a risk premium which is called the liquidity premium....