Term Structure Theories │ CFA Level 2 | Fixed Income

Описание: What’s up, future Masters of the Universe? If you think the yield curve is just a line on a Bloomberg terminal, you’re already behind. To become the best in the world, you need to understand the darr (fear) and the paisa (money) behind the shape of that curve.
In this video, we aren’t just passing an exam; we are mastering the dynamics of the fixed-income world. We’re breaking down the four OG theories that explain why interest rates do what they do. No fluff, no filler—just straight fire.
What we’re covering:
1. Unbiased Expectations Theory (Pure Expectations): The "Risk-Neutral" fantasy. 🦄 This theory assumes bonds of any maturity are perfect substitutes. Whether you buy a 5-year bond or roll five 1-year bonds, the expected return is the same. It’s a world with no risk premiums—basically, a world that doesn’t exist, but we gotta know it anyway.
2. Local Expectations Theory: The "Short-Term Only" version. It claims the expected return for every bond over a tiny holding period is just the risk-free rate. Spoiler alert: the market usually proves this wrong because long-dated bonds typically kick ass over short-dated ones.
3. Liquidity Preference Theory: The "Pay Me for My Patience" model. 💸 Investors aren't stupid; they know long-term bonds have more interest rate risk. So, they demand a liquidity premium. This is why the curve is usually upward-sloping. Forward rates are upwardly biased predictors of future spot rates here.
4. Segmented Markets Theory: The "Stay in Your Lane" approach. Pension funds buy long; money markets buy short. Supply and demand in each segment determine the yield. Period. No crossovers allowed.
5. Preferred Habitat Theory: The "Everyone Has a Price" theory. It’s like Segmented Markets, but with more greed. Investors prefer a maturity, but they’ll deviate if the yield premium is fat enough. This explains how Quantitative Easing (QE) actually works