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Tag Archive: Interest rate


What determines the shape of the zero curve? Why is it sometimes downward sloping sometimes upward sloping and sometimes blogpartly upward sloping and sometimes partly downward sloping?

Lot of theories have been proposed but the simplest one is the expectation theory which conjectures that long-term interest rates should reflect the expected future short-term interest rates. More precisely, it argues that the forward interest rates corresponding to a certain future period is equal to the expected future zero interest rate for that period.  Continue reading

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From the last Monetary policy RBI has started publishing Post Policy Conference Call with Researchers and Analysts providing transparency.BTXtODVCQAALUaw

There are a lot of questions on the interest rates including MSF, LAF and OMOs.

You can read the full edited script on RBI Website

With reference to the above lets focus on The “term structure” of interest rates refers to the relationship between bonds of different terms. When interest rates of bonds are plotted against their terms, this is called the “yield curve”. Economists and investors believe that the shape of the yield curve reflects the market’s future expectation for interest rates and the conditions for monetary policy.

Usually, longer term interest rates are higher than shorter term interest rates. This is called a “normal yield curve” and is thought to reflect the higher “inflation-risk premium” that investors demand for longer term bonds. Continue reading

Leverage versus Debt

Few days back Macro business published an article on Leverage versus debt . Found interesting and thought of sharing my point of view on it.Google

Europe, Japan and America are printing money at an extraordinary rate. It has reduced the cost of debt to negligible levels. Usually this is explained with reference to what is happening in the conventional economy, but I suspect there may be another explanation. The systemic effects of the bizarre financial system that we have created, which is based on leverage. That leverage, which is thought of as debt, is not really what we mean by debt.

One of the features of the explosion of derivatives in the last 15 years, the rise of “meta money”, is that it was achieved through the creation of massive amounts of leverage. When Long Term Capital Management nearly destroyed the world financial system in 1998, it was done through a highly leveraged play on the rouble. LTCM was brought undone when Russia defaulted on its bonds.  Continue reading

As I posted yesterday on the Inverted Yield curve, as the future yield is a function of the expected spot rate and the term premium, either of imageswhich could go up or down separately or together. The talented RBI researchers should come out with their interpretation of the current yield trends of gilts in the forthcoming Annual Report of the Bank. So let’s try to build analogy on Term structure moving forward.
The “term structure” of interest rates refers to the relationship between bonds of different terms. When interest rates of bonds are plotted against their terms, this is called the “yield curve”. Economists and investors believe that the shape of the yield curve reflects the market’s future expectation for interest rates and the conditions for monetary policyContinue reading

Debt and Leverage

Couple of days back Macro business published an article on Leverage versus debt . Found interesting and thought of imagessharing my point of view on it.

Europe, Japan and America are printing money at an extraordinary rate. It has reduced the cost of debt to negligible levels. Usually this is explained with reference to what is happening in the conventional economy, but I suspect there may be another explanation. The systemic effects of the bizarre financial system that we have created, which is based on leverage. That leverage, which is thought of as debt, is not really what we mean by debt.

Continue reading

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