Kap. 1

1. direct finance -> borrowers sell securities directly to lenders in financial markets (market-based system) -> direct claims between lenders & borrowers

2. indirect finance -> asset-transforming institution between borrower and lender (bank-based system) -> both have claims against banks (due to no direct financial relation)

1. normal (upward slope) -> future short-term interest rates expected to raise or stay the same

2. Flat -> future short-term interest rates expected to fall moderately

3. Inverse (downward slope) -> future short-term interest rate expected to fall sharply

Expectations Theory -> shape of yield curve contains information about the market expectations of future short-term rates

expec. economic slowdown -> weaker demand & inflation -> central bank likely to lower interest rates -> higher demand long-term bonds -> i long decreasing

1. Expectations Theory -> bonds of different maturities are perfect substitutes -> buyers dont prefer one maturity over another

2. Segmented Market Theory -> bonds of different maturities arent substitues at all -> investors have preferences for bonds of one maturity (most investors prefer shorter bonds, due to lower interest rate risk -> their preferred habitat)

3. Liquidity Premiun & Preffered Habitat Theory -> bonds of different maturities are substitues (but not perfect) -> comb. Expectations Theory & Segmented Market Theory

1. Floating exchange rate

2. Fixed exchange rate -> central banks trades domestic currency for foreign currency to fix exchange rate

measures the interest rate sensitivity -> timing of cash-flows is taken into account

(shorter bond duration-> lower price volatility)

adjusted for changes in price level (inflation)

-> equilibrim results are ambigous

BUT in reality -> interest rates tend to fall -> rising bond prices

1. lower demand on corporate bonds (ceteris paribus) -> price declines -> higher interest rates

2. higher demant for treasury bonds (ceteris paribus) -> price increases -> lower interest rates

-> Credit Spread increases (i corporate - i treasury)