Question

Before the financial crisis, many corporations have been using CP market as an important funding source...

Before the financial crisis, many corporations have been using CP market as an important funding source to support their daily operations. Explain briefly how this has affected the yield curve based on Market Segmentation Theory.

Homework Answers

Answer #1

Market segmentation theory says that short term interest rates and long term interest rates behave independently and are not correlated.

The CP markets offer securities of very short term maturities. They therefore impact the yield curve for short term maturities. The shape of the CP yield curve (0 to 90 days maturities) is very similar to the yiled curve for short term maturities. Thus based on Market segementation theory:

  • Popularity of CP has given way to CP yield curve (usually varying between 0 to 90 days maturity)
  • The shpe of this curve impacts the short term yield curve. Thus shape of short term yield curve is similar to CP yield curve.
  • CPs don't impact the long term interest rates (as per market segmentation theory)
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
The fallout from the financial crisis of 2008 included an overheated real estate market, fueled by...
The fallout from the financial crisis of 2008 included an overheated real estate market, fueled by home purchase incentives, poor lending practices, and securitization through high-risk, mortgage-backed securities, which led to a near collapse of global capital markets. As a consequence, many have argued that if the financial institutions had been required to report their loans (and loan-backed investments) at fair value instead of cost, large losses would have been reported earlier. This would have signaled regulators to the problems...
Despite an enormous potential market, many Biotech companies have shied away from R&D funding related to...
Despite an enormous potential market, many Biotech companies have shied away from R&D funding related to drug and alcohol addiction. Your firm, D&S, is a notable exception. It has spent 200 million to date working on a cure, but is now at a crossroads. It can either abandon its program or invest another $80 million today. Your opportunity cost of funds is 10%; unfortunately, it will take another five years before final approval from the Food and Drug Administration is...
Topic: Open Market Supply SHANGHAI -- Money markets are often described as the financial system's plumbing....
Topic: Open Market Supply SHANGHAI -- Money markets are often described as the financial system's plumbing. When they work, which is most of the time, hardly anyone notices, but when they get blocked up, it creates quite a stink. That is why China's money market -- in which banks and other financial institutions borrowed some $6.4 trillion from each other last month alone to fund their daily needs -- is becoming one of the world's most important markets to watch....
STEPHENSON REAL ESTATE RECAPITALIZATION         Market value balance sheet before the land purchase is: Market value...
STEPHENSON REAL ESTATE RECAPITALIZATION         Market value balance sheet before the land purchase is: Market value balance sheet Assets $533,500,000 Equity $533,500,000 Total assets $533,500,000 Debt & Equity $533,500,000 Market value balance sheet after purchase of land: Note, to calculate the NPV of the project, you must perform a calculation to determine the earnings they will receive from this purchase                Market value balance sheet Old assets $533,500,000 NPV of project enter value Equity enter value Total assets Sum total...
53. Which of the following is the Fed’s most important policy interest rate? (a) federal funds...
53. Which of the following is the Fed’s most important policy interest rate? (a) federal funds rate; (b) the rate on 2-year Treasury notes; (c) the rate on 10-year Treasury notes; (d) the rate on 30-year fixed-rate mortgages. 54. In which market would a bank with excess reserves attempt to sell reserves to a bank with insufficient reserves? (a) Treasury bill market? (b) federal funds market; (c) bond market; (d) NASDAQ. 55. When compared with monetarist theory, Keynesian theory places...
51. Which statement about the Federal Open Market Committee is untrue? (a) the Secretary of Treasury...
51. Which statement about the Federal Open Market Committee is untrue? (a) the Secretary of Treasury always is a voting member of the Committee on monetary policy decisions; (b) the President of the New York Fed, by tradition, always is a voting member on policy matters; (c) the Committee formulates, but does not implement, monetary policy; (d) its policy decisions do not require a consensus among voting members. 52. An open market operation designed to add reserves to the banking...
Whatever It Takes: How the Fed Aims to Rescue the Economy The central bank is using...
Whatever It Takes: How the Fed Aims to Rescue the Economy The central bank is using tactics from the last financial crisis and deploying new ones to keep money flowing. Here are the basics. The Federal Reserve, under Jerome H. Powell, is moving to shore up the American economy during the coronavirus pandemic. Credit...Yuri Gripas/Reuters By Ben Casselman March 23, 2020 The Federal Reserve on Monday pledged to do, in essence, whatever it takes to keep the economy from collapsing...
For this assignment, imagine you have been contacted by an agency in your community to provide...
For this assignment, imagine you have been contacted by an agency in your community to provide consultation on how they might improve their services to clients. The agency is concerned that clients with serious counseling issues are "falling between the cracks" when they are referred to others in the community for intensive treatment. Furthermore, the brief aftercare they provide is not accessible enough to sufficiently support clients as they re-integrate into the community.           Chemically dependent persons with recurring mental...
Analyzing Starbucks' Equity Structure and Financial Position Using either Starbucks’ most current Form 10-K or the...
Analyzing Starbucks' Equity Structure and Financial Position Using either Starbucks’ most current Form 10-K or the company's annual report, answer the following questions and prepare a professionally written financial analysis report and, forward opinion on Starbucks from the perspective of a portfolio manager. Base your opinions and recommendation on the fact that you are the portfolio manager. Your client already owns 15,000 shares of Starbucks’ common stock. Furthermore, the client has the funds to buy an additional 10,000 shares of...
For this assignment, imagine you have been contacted by an agency in your community to provide...
For this assignment, imagine you have been contacted by an agency in your community to provide consultation on how they might improve their services to clients. The agency is concerned that clients with serious counseling issues are "falling between the cracks" when they are referred to others in the community for intensive treatment. Furthermore, the brief aftercare they provide is not accessible enough to sufficiently support clients as they re-integrate into the community.           Chemically dependent persons with recurring mental...