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Essay / Research Paper Abstract
This 8 page paper answers asked by the student on how bond yields are calculated, and the information they give for investment strategy choices.
Page Count:
7 pages (~225 words per page)
File: TS14_TEbondyl.rtf
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Unformatted sample text from the term paper:
an individual investment money there is an expectation of a greater return for the higher commitment, and the rate of return will usually increase in order to attract money for
this longer period. If we consider this logically, if there is not incentive to invest for longer, then there is nothing to stop the investor taking the shorter term option,
as this gives increased liquidity and increases choices, will the longer term option available, but this leaves them free to try to find another investment with a better rate. Therefore,
long term investments have an opportunity cost, which is compensated for with an expected higher return. However, this
is not the only influence. The role of expectations will also create changes, if it is expected that inflation will increase, this will result in an expectation that interest rates
will increase, and as such the interest rate offer will be higher, and if they are expected to drop, we will see this reflected in a drop of the yield.
During the times when bonds with higher yields were issued it is likely that overall interest rated were higher, and as such
the yields need to match this. It is interesting to note in all cases that there was a drop in the yields at the same time, this reflects the expected
market conditions. Question 2 The bond process will not always plot close to the yield curves due to the way in which pricing will occur and also the role
of supply and demand. When these bonds have prices after the initial offering, these are determined by supply and demand. This will often result in the bond price adjusting to
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