Tuesday, May 26

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Liquidity Preference Theory

Liquidity Preference Theory  Since the previous two theories could not adequately explain the facts of the term structure of  interest rate, a more logical way to deal with this problem is to combine the best features of both  theories. A combination of these two theories gave rise to what is largely called the liquidity  preference theory.  The liquidity preference theory originated with Hicks (1939), and according to Dzigbede (2003),  it was largely derived from the empirical experiences of the 1930s when short rates were  significantly below the long term rates. In this era, it was assumed that this was the natural  relationship between the short and long term rates of return.  According to Mishkin(2010) the liquid...
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Criticism and limitations of the expectations theory

According to Kessel (1965), the expectations theory has had widespread appeal for theoretical  economists primarily as a result of its consistency with the way similar phenomena in other  markets, particularly futures markets, are explained; however this hypothesis has been widely  rejected by empirically minded economists and practical men of affairs. It was rejected by  economists because investigators have been unable to produce evidence of a relationship  between the term structure of interest rates and expectations of future short-term rates (Kessel,  1965). Other economist simply have found it difficult to accept the view that long- and short-  term securities are perfect substitutes for one another in the market. (Kessel, 1965...
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What you need to know

The term structure of the interest rate has become in the past few years an overwhelming fertile  grounds which includes a lot of research into the effects or influence of the various macro-  economic variables such as inflation, income and the what snots .in this chapter, we shall delve  into the theoretical and empirical analysis on how the yield spread future change in real interest  rate as well as the yield spread future change in the inflation relationships is made. Some other  general studies or inquires related to this study will be made.  2.1 The Theoretical Literature  A simple study of the theoretical aspects of the research will be made known as well as some  theories of some prominent economists will be put forwa...
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What’s a bond?

A bond represents a debt relationship between the bond holder and the issuer. Bond yield is often  affected by the changes in interest rates. The central bank (Bank of Ghana) reviews the interest  rate from time to time based on inflation rate and other macroeconomic variables like money  supply and market liquidity. Bonds can be affected by changes in short-term versus long-term  interest rates in various ways. Bond yield curve can be constructed by plotting the prices of  different maturity bonds. The yield curve shows the relationship between yield and maturity.  Yield curve work best when plotting different maturity dates for the same type of bond and by  comparing the bond yield that are similar, but with differing maturities, o...