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January 3rd, 2014, 12:27 PM   #1
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Yields

Hi guys.
Can someone help me explain this?

"Why does yields on long term bonds higher than that on short term bonds?"

I haven't touched financial mathematics in months...I don't even know the basic things now ='(
Thank you!
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January 3rd, 2014, 01:42 PM   #2
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Re: Yields

Nevermind.
I found the answer.
Was looking at some old notes and videos.

It's because of the relationship between bond price and interest rate right?
The longer the maturity date is, the lesser the Present Value is.
So longer time to mature, lower bond price, higher yield to maturity.
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January 3rd, 2014, 03:28 PM   #3
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Re: Yields

I think it's asking a deeper question: why is the annual rate higher on long-term than short-term bonds?
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January 4th, 2014, 03:29 PM   #4
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Re: Yields

I doubt if it is true under all conditions. At the present time, short term rates are very low because the Fed. sets them. However the general expectation is that eventually the short term rates will go up. Therefore long term rates include an estimate of the effect of this future rise.
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January 5th, 2014, 02:05 AM   #5
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Re: Yields

Why would short term rates be expected to increase?

On another note, could it be that long term bonds have higher yields because of the higher risk?
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January 5th, 2014, 08:13 AM   #6
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Re: Yields

Quote:
Originally Posted by cancergirl92
Why would short term rates be expected to increase?
The federal funds target interbank rate is 0-0.25%... can't go much lower. When that increases it will trickle through the system.
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January 5th, 2014, 04:12 PM   #7
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Re: Yields

Quote:
Originally Posted by cancergirl92
Why would short term rates be expected to increase?

On another note, could it be that long term bonds have higher yields because of the higher risk?
Historically short term rates have been slightly higher than the rate of inflation. At present they are lower because of Fed. policy.
If you are talking about long term treasuries, the main risk is the effect of inflation.
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