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64 pad atl alam | *, ms Weel Badue — (D a @ brace Level Mot > Price bevel 9 OM p> Price f> te sip ln genees| , lide thet is immedicte 4 AN» J ~The other ects Aappen chwly (usually ) but are posetent O biguidity eect ominevits ot tPA ™ 1 €@ Laguodsty effect simil, Rapid response & price keve/, 7° @ te aan i Lis 1 Fine Choplev bo Risk and Fern etructure . of itera 20S ~ We vey the etsvunrtion of | Sanity /Pond Posens soy Bans with a ben ag Why Bonds with she some Matunty fave differert intevest us Y ha D Default Risk ———> The pebobilty thet the issuer 8 Lipuidety or the bord soil! not be able to e vepy the iferest pats °° @ Toye contidorertions He Five value hack. KUS Tresary Ponds ove Considered "Reole fee Free" Federal Gov't fon Yaize tow vevenwe Risk The spread on bemle with eetoult Pee eke and the pol-tee ote ( Spreod) hehooen itereet rates. ) > Rele Promiun (4 positwe ~ |iforet yon love te be Compernected! for tally, on bore pisk fe pretium) OA ben have o positive>/vt BECO bo Risk Shuckwe & ivterest rates > why bends w/ the cme tine fo Iehuytty coun Lowe dcflenect whevest yates O Defoult Risle ® Liguidty (Meat lui vs FBills ) ® Tax Comickractions TF Tox lroks Gr hal Jefe prevonce| Cu donk vith defoult rele vail always hove 0 prsitive ri AG nla piers preimiin : Diference Letireer dhe uitenest ov or vide/ asset avd a ridkkess acet (US Tt bob? Rip- éne be >? ¥ the greater de obefoult ik, the greeter the Rp ae nitolly Po P* co Cope howd boi Pur. ot IK | ce ol 7 “T= Teens band | 4ape % 2 ligudity | = Trecuuy Ponds most ligui ” >Most leah roded > lowest cost to trode — Corpprode bands = les Fewd > Fewar of then in Met > Aghor- cod trade > Copnate Bonde Become lose tpaid PEL, PA, LEM 20TH, PtH, (td lag da be @ fnome %x conadrertion SMuncpl, Fecal, Fae bore, ore exempt Gaim Fesleral sncove > ally, fMevensiag the Opected Teforn ksh ve 7 frente Borel ex) Iname tr¥ te is EY, fou oun w the Caper ond with @ /o7. carpon poyment. This yeov yee pet ¢1,000 « .'0 = $100 Heep $100 (1-36) ~ 4/006 6) : > bee You hue the option & ivctend you can fay 0 smaniza) bord Foo aud rupn rife of 27 4 > of the end of (year youa4 & wereld of nde? uote Gon monet pal bord: grcan be les oH Lyeasuny bonds Mow , oszume Forcysile toe break on muvicips! Bud's > Expected Returus on Mobirds b Crelatise & T-Bords) D6, dT , . 2 (a-&, <0 Pan ind, PUbiTh wee Policy Example » Bush Tax ciate Whot one she impacts on ee v Iniome “ew > Expeded Return on T-Brile 4h > DT > Expected Redan on Mawiapal Bande (Rebdive te 7 Bands) - Dy D* R= pre, Cw aja Dads pad jag Ri t>0 Tern Gbruchere of interest detec > Secles f. Splain voly bande with the sane rick, Neue faye coneideretons Jae dflerert fnferest rodes Time bo etwity Dytees, the riferest rates and mila Powde!aed & Weed of nde? iutored ton spunietpal bonds gorcon be less thou Lyeasuyy bonds Non, assume Forasile tax break on Municip! Bods > Expedel Peturie un M-bevrds 4 Creletise & T-Bords) D6, bts , ‘ . -Lp <0 Pun ind, Prd ith wer Policy Example » Bush Tax ciate Whet ore he impacts om ¢¢ Vv Income “ox —> Bipeced Rete on T-Ball b> bth > Expected Retin on Moniapal Barre (Rebdive te 7 Bands) - Das D*h> pth, ( jh Dabs pad jap PPE 0 Term Gbructore of inkerest Inder 2 Seeks + eplain why bonds cath the came rick, lgurdty, owl oye consrdercdons fave tAfereert fewest roctes KT fo Uefrity Dyfees Ketd Cave: A plot ob ine, the riferest tates and time nxtuuty of" cimilar Bonde!Ex) fiferet ow AB bey in OF T ete average a ST te fe 257% tot Yea the the wteredt ov a reseer Band vomld. be i = Bt. | a6 faye, Oe Rey SY Assumes bowl with cbfkevert bnatonties Ore perlert absttires, Decors will ret boll Pork wirkow pete! huts bev dan onather Feprllecs &C mutwityes . , 2 Implies that epecled refurns across lauds ove epval Consider fe following, Javectorerf Stredegles Oforchoce >, [yew boa ds (one this yea, Cite hep reor Parchose Ove, d fomorrow's fees rele Ot = iifevest re or m boul Iiturlag 2 yer! Lom toe bay 2 eppected bord ((uuecting $ 1) ogected Retin i the expect retin 14 a ; eo2he Pesrbe Term Gtruchure of thteree! mves Yield Gave \A Plo} ching the relationship befwren « bonds fone & mectotly oud the twfevet bafe © Upward Slapmg (losst) 1 tld @ iferect. Yt Tiose te WiAtinntty NK Emprieal Fac, shout yell Cowes D Interest reese bord w/difterot maturities move gether. Q When dert-tenn ivderc# rates are fd, Yell Carvel oe mere likely to have an cpuerd: dpe atl Vie VES cn O rel Corves almost aluays zope uparrral the free phesiff vy BE xpetetion -theary> ephins 0, 9 By Segmented Mmorket theary > plains @ A Liguity Preminn they > explains 0 O@ Let L1B = Lan RerenBow dsAf Getting thew egual DO Short ter interest yedoc ove Qise™ & +1£+ te ore huy Fenn retes ise = & He © Wher chert term rales S one hus Reale Spec them to vice tu the fdure 4 an bee bel, > thong term redec lye = ete tht tH 7 hi r z BGwt eplin why veld Curves vvelly wy apa i tp Pl eg mented Morbet Theory — Polar opposite of expectetione thesr| = Sees Te tete br bonds with “level rirtaritpet conpeletly Se percte$ > Interest rates cbetermimed (u cliflerent Aarkets K Bonde are ot anhetifutes, Pople pave preleveries tor cerfai, Asturities Since Mkte one seynetted , thie. theory does @ goo Joh explain tact ® ‘ ~ * pens @ Peeple (genernly) prefer etl yer LTP. Clece interest wife ck, > Dapdh > Oleod ae Pho > Cag f Lasdity Pretian (aud preferredhg Lg diy frantivin + Theory The tnferest sete on LTB vill equl ac, on averuge of the wferestenn GB ee pected -te oCeyr over the [Em /i fe of the LTB Phas 9 lig ity Premtving ¥ Ponds of Jihactrt atuvities eve sulettute @ out wet Rev fect substitute, — D Bonds ane Substitutes @ Alley item investeye te Lave Preferences over Larch uti, dierent mortuviti_es Firally the interes} rote caleulstion on 0 hove) Alar tyetarteg io "PSyears ish : até tee: Flay (nt? ————— [+tne d- banidey Preinum » interest vote of « bend! Arstoning ttn 1 yeoss Gosigeg Fig € put of Vew . Ex) Irfewes ov Liquidity Prcording ty bynidity PrerinTecry eon | ore fer bands} Prettinn wolet the "gente! iherecf (net | oY ° oh a 2 b% ee > 07 5 2p bond a | 8. Is | be [REET A, pourd | 44 / — ice a bBmey @ nea: S yer Bord ° oeFreloel Unbtet Theory & Perle hove stg rclerewces thusrde horde fcorbre drddunties (hab-ttacts) => ae waillieg to ole! bord, wlother yotwities i dey We higher eqected vets > Comes fo Game conchigions a6 A guidity heavy liguidity prekerene theary Ye aN lipailty Fete, |____s- s~ epittins tony Ye ne fo | Yam ‘ iy. spec Ung * bet + besten) thee > Short wb-team 8:4 > Lon fount Wiadanry? radiclive L xexeszion iste Heoltley Gonomy Etter | Lr > Ficture short form tte expected & a Soy seme phe caine yoy a a i 2G Holes ove =2ps CHD. The acle movbet , he theny F Retioval E-pectistion s and Ehkchm Chiceut wh Hyplo-heas Conmen Sock > The Shove of a cimpany , genercbed/ lswed te raise eguity Gy oh Cops estion. Stecle Holdevs 7 Oimers of commovr efck > Hove the right 4 be avecrdnal clamawt of all ash thos of aim PIE chdehlder gets whedever Venein 4 bh as! other chins agelinst te frm Aave been Pri ol Treo tances of valee fom Aebling Gloele ODridend Foymerte (usually pod at queiterly ) > Net all tacks P2/ tose, evertuaily we werk) epect then te g @ The dawert Mecle pice yu can sel (t Sr HK When we price v Sfede, the avnact price Shadel cpu rhe pet Present value of all ature cach thes ( Dindend payments Plc gale price) CExpetet ) bets see haw te volwe a Stocle in a one period alata sede / eenorie % bay 2 2 You wan te liny a Shave of Google Sr Flow /thave © Divalewed pute are 22 /yeor + You wat 4s invest $ but cyeu will need ot bade ia e Hede ie Pielected to sell bo nest yen i FShoual the 4 lov @ Po = Ps ~P» ke~ley, Pe 2o fie. Fo $07 4 Eine = bod. 62 Bey!A) ELC Hho Fide claeg Coch nme KT Va Claes Restors oad, ? Steeles Hy Pedy 7 > Corder Grove Mode! > Potions] Eepectotiow - One. Peril Paiting Mode-| _ Die Pr PM, pie Pin + Bh fe ti &) * THR) Pe Chale tile 1° Heo Tepe TE nin sbbecetly large Hom imprtout is Pa te Po? Goy « Bock celle Le $loo Byars bon row with Le=lo/. then dscowited she presut that $teo is egual te €lee ni = Foes Thus we com Coirly otturately cletermuve 0 Hack’ Pree (to des) ince’ sf of tte present diecouted value of He divideid streaw We wnt to beable to ack cbviclend gies & cur mole! * acount ~G- O Frw's growth > Gordon's Goat Mole | > Apawes 6 covttart dwidend puch rete ‘9 ' Yate! (Cafunete go vin dot) Pp. Ba(Hs) Distt), , Dalia)” Cite)" P, THk) * CreerCat le growth Meche ( Pesuveplion D Dividends gre cted fo qu af « Canslout rote Ca} forever, @ g ie occumed 4 be fece than fe. Pekerinining ock’s. maybet pice Sogpose Do~ 42 and the Bria i& epected 4 grow af a rele of 2/ ~byever-. Inesters A> uncure abot com any ture, reguires LenhZ B > has a Fiend whe works ot Company ( tect ole pb), company hols stable, feo = la¥ C& Poting CEO, Compauy is realy Gli) fee=lo7/, A Pa = Wve x0 _ $2 (How _ ° 0 Gee B) > Tete) 7 PEK pe sen = $20.40 Prog = PUY) « $22.50 An aside an the Fed owl shcle pices > Fed Imanipalectes iuberes? wll. vik buying (ella porch > How ches tis atkeot Sthde prices? bshole L Gexdn gwith Model Kor ottersvs @ Vo setimaloder the Coroimy >t > ede prices Tes theories of how expeattions ore med Thesry L ochphve opectetious.> ogumes , when peple molec expectection © abd the Kotane they onby wee pot ideoreb, te do 69. Bx) Past © yeows inflection Phas bec rowing aA CK, 50 expect if will contrite & the the wot F yeave . & Baile te tabe ial acourt Feature poliey Onnauncems fe Ye They of retina) expecstor Expectation will be identraal 4 the optim! Greco Cthe best guest, € the Artare ) veing all available inforredion (Pact , Preceert, turtuve ) Ex: Priya, to Worle - on avempe 1 falces 30 mins 4 gef te worle GGomefimes 2S miy Sometivmes 35 ) -in meh houv yee need on edra fp /Omins If yom leave duving rsh haar Vinuch Fume clo yon expect ~, peck te get te worl? Lb 4o ming Le optim! torecas/% Now guy it feck 45 mine t fwork one chy Ts yor expec ae 40 ming metenite ” > Yes, You used all ierhe > Coveef on average when Will exechtins tail 4 Le fons]? | 0 When people are ouunre of gl! quailable internation but Find les fo mel AGA to vile Heir beck Qe (Pee ® People wight, not be ousre £ aveilybe putormetlay wraldog, their expectefian fon-optimal Formal setemet of the theory) | > bee X be the vavighh we want & freaet | > X be our opediation > X" be he optims| fareast (uses all ovailable if) ~. The theory stetes X€- y of why & it “Cwect’” 4 asvme Grmna/iweters belwve rations)? DIts veally costly nof to cb so Tmmplesons of he. theo, OK there ie chauge in the way a voriable moves the way in wbich we erin expectestowS abot that voriable chonge es wel Suppose the interest Yale fas o “Abyml level” Ui, (iO sorm, > Aw escame the Fed vusls eamensidly DESPA 0b eens Yeh Cyorm fo (nonin, LC poem ? We beemt # poy pect (Horm, 7% Prev! aa 7. ( c " DI The Geact evers of ompeetions worl! on average be Il L g Zero oud rn bemlnot be predictal aheer o Pe geChcient Morket Hypethest S Pred & of the agumption Het ceawritios i Gvancts| prrkete 9 acewntly relecf at endten. ue ea - Ra Page B te each y & veh Loptl gain SR Retote of velin op a ceaurif/ bom time t to bes Pe = Price in fime & (t*1) © + Constart Coupon Pur, Constant Dividend PUT: Expected Return Ce dendes epeeted!) pee Fes Pe te thye cay Kiciet market hpathers Pha =peG, > RE RE @ Supply + Demand alysis has shown ws that there te a waplrct coving (S=D) yee oF return RR whieh the umrket Chebuxtes wound» So ur Optinal Terese LR shoud be RE Comb) > Weert «In on iiest market a Seenity, Price Luly relects oil availsble infermuction Retiows! Gp the_hypesthecis. “OD We ee Iie opportunty er arbitrage > Unesphitted grad} : : - Oppatontttes : Ex" Suppor Google steele has a true rote & return of /o% ~ RS But Hs comet Price Pe ices for Such thot Reba, Ro fea Petey pt : 7 e Spe by mone : A=p forge > Pe frs pwh Dds 12, 3% bebations Yam, Pre comteD QD OA > 5 tyes of Sgtomles and het Jer @ Simple loa Corpor bods (Capon p= TVA looper tobe) O fixed Pogmpent bow & @ Piscowmf bonds © Re pebites Rate of fahun Abt egual © Close only / period) Re Bagh te bd desely thal tf ( A). (Real cash sf bene ta hy @ wt budget ckeGeits (fo Sf) @ Ligtly Prchorme Gomescorle > Dekermine ¢ Va Aone Aapket > Reus = Bea > BEB? wm* Money Leman Owledth (wpsm’s) 7 Presploel (PAoM4y ip laflation (4p) Money 2upply aye © AMoreghiy Palgy om ivtterest Rae Doce FM? lend t U6?NG. DRick Sracture of wtereet pote s Denn aructuve of infene yates > > Yield @ cove & Flot/ Tmerled Sal ect term tes egedtel to-fall qb, hodig inh, Vecexeinly Fey upwowd sh pe ye > Expavsionsry Phoge, Short term interot rates, Tf DP Whot to the Py £ a 22K coupon lend with a JA of SL, Matwity date Srv, Fv> $3, a = Fk Ln TH = Case = $169. @ what hoppeas, hi Whe, te Keramy gees thraugh: theeconory on expausion ry jee Cuse bond AUkT cunlyss ) WAFD42 D4 ob, wt Expeded . Rhawdsr? 4 5 WU ,04 on inestrooets spre ap