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Explain the two key factors that determine the shape of the
yield curve.
Briefly explain
decisions.
how
interest
rate
levels
the
affect
level
of
business
Financial Institutions
An enterprise such as a bank whose primary business and function is
to collect money from the public and invest it in financial assets
such as stocks and bonds. Financial intermediaries are institutions
that provide the market function of matching borrowers and lenders or
traders, as well as create new financial products.
Investment banker: Financial intermediaries who perform a variety of
services, including aiding in the sale of securities, facilitating
mergers and other corporate reorganizations, acting as brokers to
both individual and institutional clients, and trading for their own
accounts.
common stock issues in the O.T.C. market. About 4,000 common stock
issues are included in the N.A.S.D.A.Q. system.
kRF = k* + IP
20%. In 1993, bills were around 3% with bonds at 5.75%. Not only
were rates different at those two times, but so was the "shape" of
the curve.
In 1981, short term rates were higher than long term (inverted). The
"usual shape" is positive; that is, with short rates lower than long.
Almost all recessions have been preceded by an inverted curve, and
such a curve usually points to lower rates in the future. A steeply
positive curve points to future higher rates.
Also, since Treasury securities are the safest available,
unconditionally backed by the U.S. Treasury, other debt securities
should yield more - they are by definition risky. Investors can judge
whether they are getting sufficient "risk premium", in other words,
enough incremental yield over Treasuries, by comparing the yield of
any bond with that of Treasuries of similar maturity.
Yield Curve
Term
Rate
6
1
2
3
4
5
10
20
30
5.1%
5.5
5.6
5.7
5.8
6.0
6.1
6.5
6.3
months
year
years
years
years
years
years
years
years
10
8
6
4
2
0
0
10
15
20
25
30