Term Structure
What Determines the Shape of the TS?
1 - Unbiased Expectations Theory
2 - Liquidity Premium Theory
3 - Market Segmentation Hypothesis
Term Structure & Capital Budgeting
w CF should be discounted using Term Structure info.
w Since the spot rate incorporates all forward rates, then you
should use the spot rate that equals the term of your project.
w If you believe inother theories take advantage of the arbitrage.