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IBO 06 INTERNATIONAL BUSINESS FINANCE
July 2020 and January 2021
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Title – IBO 06 INTERNATIONAL BUSINESS FINANCE
University – Ignou
Assignment Types – PDF, SOFT COPY /Handwritten on order
Course – Master of Commerce
(M.Com) 1st Year
Medium / Language –ENGLISH / HINDI
Session – JULY 2020, JANUARY 2021
Subjects code – IBO 06
Assignment Submission Date – July 2020 session के लिए – 30 May 2021, January 2021 session के लिए – 30 October 2021.
Master of Commerce (M.Com) 1st Year
IBO 06 Solved Assignment 2020-21
Q. 5. Define yield curve. How is it constructed? How does interest rate risk influence yield curve. Explain.
Ans. Yield curve in finance is the relation between the interest rate (and cost of borrowing) and the time to maturity of the debt for a given borrower. The yield of a debt instrument is the annualised % increase in the
value of the investment. Investing for a period of time T gives a yield Y (T). This function Y is called the yield curve, and it is often, but not always, an grow function of T. Yield curves are used by fixed income analysts, who
analyze bonds and related securities, to understand conditions in financial markets and to seek trading opportunities.
Economists use the curves to understand economic conditions.
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Construction of Yield Curve: A yield curve is constructed characteristically from (1) money market benchmark rates for short-term rates and (2) government bond yields for longer-term rates. Yield Curve indicates structure of
rate of interest. It reflects the way interests rates available in one currency vary in reference to the period of the loan.
In other words, it reflects the way floating or variable rate borrowings vary in reference to the period between each rollover or reset dates.
The yield curve can be either normal or upward sloping yield curve and the downward sloping or inverse yield curve.
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Normal yield curve is upward sloping and is also known as positive yield curve at times. This curve implies that interest rates on long-term loans are higher in comparison to short-term loans. This process further implies that the lender is compensated for tying up funds for a longer duration and the better credit risks in a longer term loan. Since in short-term maturities, the supply of fund is greater than the demand for funds and for long-term maturities demand for fund is greater than supply. Thus, this affects the short-term interest rates to decrease and push up long-term interest rates. Thus it leads to positive sloped yield curve.
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The downward sloping or inverse yield curve occurs when rate of interests are higher on short-term loans than on long-term loans. This process normally occurs when the inflation rate is high and is expected to fall, so as the interest rate will fall too. In short-term maturities, interest rates will tend to increase and for longer maturities, interest rates
will decline. Hence, the resulting curve will be negatively sloped.
IBO 06 INTERNATIONAL
BUSINESS FINANCE Solved Assignment
Interest rate risk is inspected for the reason that this form of risk is generally dominated by other risks linked with holding debt instruments. An interest rate risk is the risk that budding market conditions will bring about a change in interest rates. In view of the fact that the profits obtained on existing instruments must react to reflect the prevailing interest rates. A change in the level of interest rates will signify a change in market values of existing debt instruments. A change in the market conditions that leads to an upward and downward shift in the yield curve will manipulate most debt securities equally and all together.
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Since interest rate risk is of great importance to both the issuers and holders of the debt instruments. Since, it affects the cost of funds and may further affect the return on rate sensitive assets for issuers. This is mainly important if the returns from rate sensitive assets raised by issuing the debt instruments. This is certainly the case of every
The risk of alterations in the yield curve is one of the interest rate risks to which a company might be exposed, depending on the maturity mix of its borrowed funds or investment. By selecting a term for borrowing between roll
over and re- set dates, there is a risk that in retrospect, an alternative choice of maturity would be cheaper.
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