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Yield Curve Analysis: Choosing the optimal maturity date of investments and financing

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  • Lenz, Rainer
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    Abstract

    The shape of the yield curve determines the relationship between interest rate risk and return of investments. The analysis of the yield curve can help the investor or financier decide whether to take a short- or long term bond or loan. The management decision of choosing an optimal maturity depends on three form-giving factors of the yield curve: the general level of interest rates, the slope and the curvature of the curve. By using implicit forward rates the decision situation of investors and financiers is modeled and general decision rules for financial managers are derived.

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    File URL: http://mpra.ub.uni-muenchen.de/27781/
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    Bibliographic Info

    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 27781.

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    Date of creation: 30 Dec 2010
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    Handle: RePEc:pra:mprapa:27781

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    Keywords: yield curve; term structure of interest rates; implicit forward rates; expectation theory; optimal maturity of investments;

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    1. Gerlach, Stefan, 1995. "The Information Content of the Term Structure: Evidence for Germany," CEPR Discussion Papers 1264, C.E.P.R. Discussion Papers.
    2. Guedes, Jose & Opler, Tim, 1996. " The Determinants of the Maturity of Corporate Debt Issues," Journal of Finance, American Finance Association, vol. 51(5), pages 1809-33, December.
    3. Frederick C. Scherr & Heather M. Hulburt, 2001. "The Debt Maturity Structure of Small Firms," Financial Management, Financial Management Association, vol. 30(1), Spring.
    4. Franco Modigliani & Richard Sutch, 1967. "Debt Management and the Term Structure of Interest Rates: An Empirical Analysis of Recent Experience," Journal of Political Economy, University of Chicago Press, vol. 75, pages 569.
    5. Robin Grieves & Alan J. Marcus, 1990. "Riding the Yield Curve: Reprise," NBER Working Papers 3511, National Bureau of Economic Research, Inc.
    6. John H. Cochrane & Monika Piazzesi, 2002. "Bond Risk Premia," NBER Working Papers 9178, National Bureau of Economic Research, Inc.
    7. Petko Kalev & Brett Inder, 2006. "The information content of the term structure of interest rates," Applied Economics, Taylor & Francis Journals, vol. 38(1), pages 33-45.
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