BFF1001 Lecture Notes - Lecture 3: United States Treasury Security, Nominal Interest Rate, Liquidity Risk
Document Summary
Real risk-free interest rate = (3 month treasury bills %) - (inflation rate%) The difference between the average yield of the 3-months treasury bill and inflation rate determines the real risk free interest rate. Inflation premium would be the inflate rate itself. Default-risk premium is the difference in the average rate available to investors in the least risky corporate bonds that mature in 30 years and the average return for a treasury bonds that matures in 30 years. Maturity-risk premium is determined by the rate earned by investors on 30- years treasury bonds take away from the rate on 3 month treasury bills. Liquidity risk is a number made by prior assumptions (basis of 5 points) If there s only 1 cash flow, at a time = single sum cf0. Multiple cash flow on a timeline e. g. : cf0, cf1, cf2. If multiple cashflow are equal then it is an annuity.
