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Theories of Interest Rates

Yeild Curve-   It Shows relationship between Return and Term structure.

THEORIES OF INTEREST RATES: vEXPECTATION THEORY- As per Expectation theory, if we are actually expecting the interest rates to fall they will actually fall leading to a downward sloping yield curve and if we are expecting the interest rates to rise they will increase leading to upward sloping yield curve. So what might be the driving forces behind these expectations? ·Political and Global Factors like Government policies (Demonetization, Introduction to GST) or BREXIT. ·Increase in level expenses i.e. Inflation 
Hence, Yield curve can be upward or downward sloping depends on Expectation
vLIQUIDITY PREFERNCE THEORY- Long term bonds are less liquid compared to short term bonds , So in order to compensate investors forthe higher liquidity risk involved in long term bonds, this should be awarded with higher returns
So, Long term bonds have higher return compared to short term bonds leading to upward sloping yield curve
vINFLATI…