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4. The Yield Curve Using the Yield Curve to Estimate Interest Rates in the Future Macroeconomic Factors Influencing the Interest Rate Additional Detail on Interest Rates Bond Valuation > Additional Detail on Interest Rates Free to share, print, make copies and changes. Get yours at www.boundless.com www.boundless.com/finance?campaign_content=book_192_section_62&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=dir ect&utm_source=boundless

5. In finance the yield curve is a curve showing several yields or interest rates across different contract lengths for a similar debt contract. Based on the shape of the yield curve, we have normal yield curves, steep yield curves, flat or humped yield curves, and inverted yield curves. There are three main economic theories that attempt to explain different term structures of interest rates, namely the expectation hypothesis, the liquidity premium theory, and the segmented market hypothesis. The Yield Curve Free to share, print, make copies and changes. Get yours at www.boundless.com www.boundless.com/finance/textbooks/boundless-finance-textbook/bond-valuation-6/additional-detail-on-interest-rates-62/the-yield-curve-283- 3881?campaign_content=book_192_section_62&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=direct&utm_source=boundl ess Israel Shekel yield curve View on Boundless.com Bond Valuation > Additional Detail on Interest Rates

6. A normal yield curve tells us that investors believe the Federal Reserve is going to raise interest rates in the future. A flat yield tells us that investors believe the Federal Reserve is going to be cutting interest rates. An inverted yield curve tells us that investors believe the Federal Reserve is going to dramatically cut interest rates. A flat curve expects unchanged interest rates in the future, sending signals of uncertainty in the economy. An inverted yield curve occurs when long-term yields fall below short-term yields, indicating a fall in interest rates in the future. Using the Yield Curve to Estimate Interest Rates in the Future Free to share, print, make copies and changes. Get yours at www.boundless.com www.boundless.com/finance/textbooks/boundless-finance-textbook/bond-valuation-6/additional-detail-on-interest-rates-62/using-the-yield-curve- to-estimate-interest-rates-in-the-future-284- 3883?campaign_content=book_192_section_62&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=direct&utm_source=boundl ess Normal Yield Curve View on Boundless.com Bond Valuation > Additional Detail on Interest Rates

7. In economics, the Taylor rule is a monetary-policy rule that stipulates how much the Central Bank should change the nominal interest rate in response to changes in inflation, output, or other economic conditions. If the inflationary expectation goes up, then so does the market interest rate and vice versa. If output gap is positive, it is called an "inflationary gap," possibly creating inflation, signaling a increase in interest rates made by the Central Bank; if output gap is negative, it is called a "recessionary gap," possibly signifying deflation and a reduction in interest rates. Macroeconomic Factors Influencing the Interest Rate Free to share, print, make copies and changes. Get yours at www.boundless.com www.boundless.com/finance/textbooks/boundless-finance-textbook/bond-valuation-6/additional-detail-on-interest-rates-62/macroeconomic- factors-influencing-the-interest-rate-285- 3882?campaign_content=book_192_section_62&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=direct&utm_source=boundl ess Interest Rates in Turkey View on Boundless.com Bond Valuation > Additional Detail on Interest Rates

8. Free to share, print, make copies and changes. Get yours at www.boundless.com Appendix

9. Key terms inflationary gap An inflationary gap, in economics, is the amount by which the real gross domestic product, or real GDP, exceeds potential GDP. Real interest rate The "real interest rate" is the rate of interest an investor expects to receive after allowing for inflation. It can be described more formally by the Fisher equation, which states that the real interest rate is approximately the nominal interest rate minus the inflation rate. Recessionary gap An inflationary gap, in economics, is the amount by which the real Gross domestic product, or real GDP, is less than the potential GDP. treasury bill Treasury bills (or T-Bills) mature in one year or less. They do not pay interest prior to maturity; instead they are sold at a discount of the par value to create a positive yield to maturity. treasury bill A United States Treasury security is a government debt issued by the United States Department of the Treasury through the Bureau of the Public Debt. Treasury securities are the debt financing instruments of the United States federal government. They are often referred to simply as treasuries. There are four types of marketable treasury securities: Treasury bills, Treasury notes, Treasury bonds, and Treasury Inflation Protected Securities (TIPS), in which Treasury bills have the shortest maturity of one year or less. Treasury bond Treasury bonds (T-Bonds, or the long bond) have the longest maturity of government securities, from 20 to 30 years. They have a coupon payment every six months, and are commonly issued with maturity of 30 years Treasury bond A United States Treasury security is a government debt issued by the United States Department of the Treasury through the Bureau of the Public Debt. Treasury securities are the debt financing instruments of the United States federal government, and they are often referred to simply as Treasuries. There are four types of marketable treasury securities: Treasury bills, Treasury notes, Treasury bonds, and Treasury Inflation Protected Securities (TIPS), in which Treasury bonds have the longest maturity, from 20 years to 30 years. yield curve the graph of the relationship between the interest on a debt contract and the maturity of the contract Free to share, print, make copies and changes. Get yours at www.boundless.com Bond Valuation

10. Normal Yield Curve A normal yield curve tells us that investors believe the Federal Reserve is going to raise interest rates in the future. Free to share, print, make copies and changes. Get yours at www.boundless.com Informed Trades. "Bonds - Yield: Curves and Spreads - InformedTrades." CC BY http://www.informedtrades.com/blogs/magic/1753-bonds-yield-curves- spreads.html View on Boundless.comCC BYhttp://www.informedtrades.com/blogs/magic/1753-bonds-yield-curves- spreads.htmlView on Boundless.com Bond Valuation

11. Inverted Yield Curve An inverted yield curve tells us that investors believe the Federal Reserve is going to dramatically cut interest rates. Free to share, print, make copies and changes. Get yours at www.boundless.com Informed Trades. "Bonds - Yield: Curves and Spreads - InformedTrades." CC BY http://www.informedtrades.com/blogs/magic/1753-bonds-yield-curves- spreads.html View on Boundless.comCC BYhttp://www.informedtrades.com/blogs/magic/1753-bonds-yield-curves- spreads.htmlView on Boundless.com Bond Valuation

12. Israel Shekel yield curve This graph is an example of a yield curve on Israeli Non-Linked Fixed Rate government bonds. Free to share, print, make copies and changes. Get yours at www.boundless.com Wikimedia. "Yield curve israel shekel govt March 2008." CC BY-SA http://commons.wikimedia.org/wiki/File:Yield_curve_israel_shekel_govt_March_2008.gif View on Boundless.comCC BY-SAhttp://commons.wikimedia.org/wiki/File:Yield_curve_israel_shekel_govt_March_2008.gifView on Boundless.com Bond Valuation

13. Flat Yield Curve A flat yield tells us that investors believe the Federal Reserve is going to cut interest rates. Free to share, print, make copies and changes. Get yours at www.boundless.com Informed Trades. "Bonds - Yield: Curves and Spreads - InformedTrades." CC BY http://www.informedtrades.com/blogs/magic/1753-bonds-yield-curves- spreads.html View on Boundless.comCC BYhttp://www.informedtrades.com/blogs/magic/1753-bonds-yield-curves- spreads.htmlView on Boundless.com Bond Valuation

14. Interest Rates in Turkey Overnight rates in Turkey are estimated to fall in 2013, indicating a loosened monetary policy. Free to share, print, make copies and changes. Get yours at www.boundless.com Wikimedia. "Interest rates in Turkey." CC BY-SA http://commons.wikimedia.org/wiki/File:Interest_rates_in_Turkey.svg View on Boundless.comCC BY-SAhttp://commons.wikimedia.org/wiki/File:Interest_rates_in_Turkey.svgView on Boundless.com Bond Valuation

15. Free to share, print, make copies and changes. Get yours at www.boundless.com Bond Valuation Which of the following is a correct description of a type of yield curve? A) When all maturities have similar yields, the resulting curve is flat. B) When long-term yields fall below short-term yields, the curve is inverted. C) All of these answers. D) When long-term yields are higher than short-term yields, the curve is normal.

16. Free to share, print, make copies and changes. Get yours at www.boundless.comwww.boundless.com Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/CC BY-SA 3.0http://www.boundless.com/ Bond Valuation Which of the following is a correct description of a type of yield curve? A) When all maturities have similar yields, the resulting curve is flat. B) When long-term yields fall below short-term yields, the curve is inverted. C) All of these answers. D) When long-term yields are higher than short-term yields, the curve is normal.

17. Free to share, print, make copies and changes. Get yours at www.boundless.com Bond Valuation Which of the following predictions based on a description of the yield curve is correct? A) A normal yield curve suggests that interest rates will be raised in the future. B) A flat yield curve suggest that interest rates will be cut. C) An inverted yield curve suggests that interest rates will be dramatically cut. D) All of these answers.

18. Free to share, print, make copies and changes. Get yours at www.boundless.comwww.boundless.com Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/CC BY-SA 3.0http://www.boundless.com/ Bond Valuation Which of the following predictions based on a description of the yield curve is correct? A) A normal yield curve suggests that interest rates will be raised in the future. B) A flat yield curve suggest that interest rates will be cut. C) An inverted yield curve suggests that interest rates will be dramatically cut. D) All of these answers.

19. Free to share, print, make copies and changes. Get yours at www.boundless.com Bond Valuation Which of the following statements regarding the relationship between economic factors and the nominal inflation rate is true? A) For every 1% increase in inflation, the nominal interest rate should be raised by more than 1%. B) If the inflationary expectation goes up, the market interest rate decreases. C) If there is an inflationary gap, there will be a corresponding reduction in interest rates. D) All of these answers.

20. Free to share, print, make copies and changes. Get yours at www.boundless.comwww.boundless.com Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/CC BY-SA 3.0http://www.boundless.com/ Bond Valuation Which of the following statements regarding the relationship between economic factors and the nominal inflation rate is true? A) For every 1% increase in inflation, the nominal interest rate should be raised by more than 1%. B) If the inflationary expectation goes up, the market interest rate decreases. C) If there is an inflationary gap, there will be a corresponding reduction in interest rates. D) All of these answers.

21. Attribution Wikipedia. "Yield curve." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Yield_curveCC BY-SA 3.0http://en.wikipedia.org/wiki/Yield_curve Wikipedia. "Term structure of interest rates." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Term_structure_of_interest_ratesCC BY-SA 3.0http://en.wikipedia.org/wiki/Term_structure_of_interest_rates Wikipedia. "treasury bill." CC BY-SA 3.0 http://en.wikipedia.org/wiki/treasury%20billCC BY-SA 3.0http://en.wikipedia.org/wiki/treasury%20bill Wikipedia. "Treasury bond." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Treasury%20bondCC BY-SA 3.0http://en.wikipedia.org/wiki/Treasury%20bond Wikipedia. "Interest rate." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Interest_rateCC BY-SA 3.0http://en.wikipedia.org/wiki/Interest_rate Wikipedia. "Output gap." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Output_gapCC BY-SA 3.0http://en.wikipedia.org/wiki/Output_gap Wikipedia. "Taylor rule." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Taylor_ruleCC BY-SA 3.0http://en.wikipedia.org/wiki/Taylor_rule Wikipedia. "Recessionary gap." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Recessionary%20gapCC BY-SA 3.0http://en.wikipedia.org/wiki/Recessionary%20gap Wikipedia. "inflationary gap." CC BY-SA 3.0 http://en.wikipedia.org/wiki/inflationary%20gapCC BY-SA 3.0http://en.wikipedia.org/wiki/inflationary%20gap Wikipedia. "Real interest rate." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Real%20interest%20rateCC BY-SA 3.0http://en.wikipedia.org/wiki/Real%20interest%20rate Informed Trades. "Bonds - Yield: Curves and Spreads - InformedTrades." CC BY http://www.informedtrades.com/blogs/magic/1753-bonds-yield-curves-spreads.htmlCC BY http://www.informedtrades.com/blogs/magic/1753-bonds-yield-curves-spreads.html Wikipedia. "Yield curve." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Yield_curveCC BY-SA 3.0http://en.wikipedia.org/wiki/Yield_curve Wikipedia. "Treasury bond." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Treasury%20bondCC BY-SA 3.0http://en.wikipedia.org/wiki/Treasury%20bond Wikipedia. "treasury bill." CC BY-SA 3.0 http://en.wikipedia.org/wiki/treasury%20billCC BY-SA 3.0http://en.wikipedia.org/wiki/treasury%20bill Free to share, print, make copies and changes. Get yours at www.boundless.com Bond Valuation