Category: bond pricing
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Segmented market theory
in bond pricingAfter discussing the expectations hypothesis and the liquidity preference theory, we’ll now focus on the segmented market theory as another prominent theory of term structure. At its core, this theory posits that different segments or sectors of the bond market operate independently of each other, each driven by its unique supply and demand dynamics. Unlike…
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Liquidity preference theory
in bond pricingThe liquidity preference theory of the term structure posits that investors demand a liquidity premium for holding long-term bonds relative to short-term bonds due to the added risk and uncertainty associated with tying up funds for an extended period. This liquidity premium compensates investors for forgoing the flexibility to react to changing market conditions or…
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The expectations hypothesis
in bond pricingThe expectations hypothesis of the term structure stands as a foundational concept for understanding the relationship between short-term and long-term interest rates. It provides valuable insights into bond market dynamics, yield curve behavior, and interest rate forecasting. In this lesson, we begin by introducing the key terms and, then, explain how this theory works with…
