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What is the term structure of interest rates also known as?
What is the term structure of interest rates also known as?
Long term interest rates are typically lower than short term interest rates.
Long term interest rates are typically lower than short term interest rates.
False
What is the main difference between a yield curve and a term structure of interest rates?
What is the main difference between a yield curve and a term structure of interest rates?
The term yield curve is less precise, while term structure of interest rates is a more specific term.
The graph of the term structure of interest rates shows the interest rates for a particular ______________ on a particular day.
The graph of the term structure of interest rates shows the interest rates for a particular ______________ on a particular day.
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Match the credit rating categories with their descriptions:
Match the credit rating categories with their descriptions:
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What happens to the economy when short term interest rates increase fast?
What happens to the economy when short term interest rates increase fast?
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A credit worthy borrower will have a lower interest rate.
A credit worthy borrower will have a lower interest rate.
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What is the main factor that affects the interest rate of a loan?
What is the main factor that affects the interest rate of a loan?
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What is the purpose of a credit spread in interest rates?
What is the purpose of a credit spread in interest rates?
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The credit spread is the same for all maturities and borrower qualities.
The credit spread is the same for all maturities and borrower qualities.
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What is the term structure of nominal rates?
What is the term structure of nominal rates?
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A _______________ bond is a type of bond that allows the borrower to stop the deal and return the bond to the lender.
A _______________ bond is a type of bond that allows the borrower to stop the deal and return the bond to the lender.
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What is the effect of collateral arrangements on interest rates?
What is the effect of collateral arrangements on interest rates?
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Match the following factors with their effects on interest rates:
Match the following factors with their effects on interest rates:
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The expected inflation premium is the same for all maturities.
The expected inflation premium is the same for all maturities.
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What is the purpose of seniority in loan agreements?
What is the purpose of seniority in loan agreements?
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What happens to interest rates when the credit quality deteriorates?
What happens to interest rates when the credit quality deteriorates?
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A recession is good news for the economy.
A recession is good news for the economy.
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What is the purpose of a maturity premium?
What is the purpose of a maturity premium?
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The term structure of interest rates is affected by the _______________ premium, which accounts for the uncertainty of purchasing power in the future.
The term structure of interest rates is affected by the _______________ premium, which accounts for the uncertainty of purchasing power in the future.
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Match the following concepts with their definitions:
Match the following concepts with their definitions:
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What happens to interest rates when demand for credit is high?
What happens to interest rates when demand for credit is high?
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A longer maturity of the debt instrument results in a lower interest rate.
A longer maturity of the debt instrument results in a lower interest rate.
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The lender faces risks, including credit risk, which requires a _______________ to be added to the interest rate.
The lender faces risks, including credit risk, which requires a _______________ to be added to the interest rate.
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Study Notes
Term Structure of Interest Rates
- The term structure of interest rates is a graph that shows the interest rates for different maturities, ranging from 1 day to 30 years, on a particular day.
- It is also known as the yield curve.
Characteristics of the Term Structure of Interest Rates
- The graph typically slopes upwards, indicating that long-term interest rates are higher than short-term interest rates.
- The slope of the curve can be affected by the creditworthiness of the borrower, with less creditworthy borrowers having a higher interest rate.
Credit Rating and Interest Rates
- AAA rated bonds have a lower interest rate due to their low default risk.
- The credit rating of a bond can affect the interest rate, with lower-rated bonds having a higher interest rate.
Monetary Policy and the Term Structure of Interest Rates
- An increase in short-term interest rates can make the curve slope downwards, indicating bad news for the economy.
- This can lead to a decrease in credit demand, which can slow down the economy.
Shapes of the Term Structure of Interest Rates
- The normal shape of the curve is upwards sloping (B).
- A descending curve (C) can indicate bad news for the economy, potentially leading to a recession.
Decomposition of an Interest Rate
- The interest rate can be broken down into three components: the short-term risk-free interest rate, the maturity premium, the expected inflation premium, and the credit spread.
- The short-term risk-free interest rate is determined by the demand and supply for loanable funds.
- The maturity premium is a compensation for the delay in consumption.
- The expected inflation premium is a compensation for the potential loss of purchasing power.
- The credit spread is a compensation for expected credit losses.
Other Factors Affecting Interest Rates
- Special contractual provisions, such as seniority and embedded options, can affect the interest rate.
- Collateral arrangements can make the loan more secure and reduce the interest rate.
- Differential tax treatment can also affect the interest rate.
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Description
Learn about the relationship between time to maturity and interest rates, researching the Belgian Government's findings. Discover the graph that results from plotting interest rates against time to maturity.
